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R&D Behavior and the Emergence of Fat Tailed Firm Size Distributions

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  • Babutsidze, Zakaria

    () (UNU-MERIT)

Abstract

This paper presents a simple boundedly rational model of a firm and consumer behaviour. We formulate an entry game, where every firm decides on investing in R&D for inventing a new product that will appeal to certain group of consumers. The success depends on the amount of funds available for the project as well as firm's familiarity with the relevant proportion of taste space. We identify the section of parameter space where firms have an incentive to diversify. For these parameter constellations the model results in rich industrial dynamics. Equilibrium rm size distributions are heavy tailed and skewed to the right. The heaviness of the tail depends on one industry-level parameter.

Suggested Citation

  • Babutsidze, Zakaria, 2009. "R&D Behavior and the Emergence of Fat Tailed Firm Size Distributions," MERIT Working Papers 056, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
  • Handle: RePEc:unm:unumer:2009056
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    File URL: https://www.merit.unu.edu/publications/wppdf/2009/wp2009-056.pdf
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    References listed on IDEAS

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    1. Rufin Baghana & Pierre Mohnen, 2009. "Effectiveness of R&D tax incentives in small and large enterprises in Québec," Small Business Economics, Springer, vol. 33(1), pages 91-107, June.
    2. Tor Jakob Klette & Samuel Kortum, 2004. "Innovating Firms and Aggregate Innovation," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 986-1018, October.
    3. Luís M B Cabral & José Mata, 2003. "On the Evolution of the Firm Size Distribution: Facts and Theory," American Economic Review, American Economic Association, vol. 93(4), pages 1075-1090, September.
    4. Silverberg, Gerald & Verspagen, Bart, 1994. "Collective Learning, Innovation and Growth in a Boundedly Rational, Evolutionary World," Journal of Evolutionary Economics, Springer, vol. 4(3), pages 207-226, September.
    5. Erzo G. J. Luttmer, 2007. "Selection, Growth, and the Size Distribution of Firms," The Quarterly Journal of Economics, Oxford University Press, vol. 122(3), pages 1103-1144.
    6. Richard R. Nelson, 1982. "The Role of Knowledge in R&D Efficiency," The Quarterly Journal of Economics, Oxford University Press, vol. 97(3), pages 453-470.
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    Cited by:

    1. Zakaria Babutsidze, 2012. "Consumer Learning through Interaction: Effects on Aggregate Outcomes," Chapters,in: Evolution, Organization and Economic Behavior, chapter 4 Edward Elgar Publishing.

    More about this item

    Keywords

    R&D; Product innovation; Market knowledge; Firm size distribution;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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