IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

The Emergence of Firms in a Population of Agents

Listed author(s):
  • Robert Axtell

A model in which heterogeneous agents form firms is described and empirically tested. Each agent has preferences for both income and leisure and provides a variable input ('effort') to production. There are increasing returns to cooperation, and agents self-organize into productive teams. Within each group the output is divided into equal shares. Each agent periodically adjusts its effort level to maximize its welfare non-cooperatively. Agents are permitted to join other firms or start up new firms when it is welfare maximizing to do so. As a firm becomes large, agents have little incentive to supply effort, since each agentÕs share is relatively insensitive to its effort level. This gives rise to free riders. As free riding becomes commonplace in a large firm, agents migrate to other firms and the large firm declines. It is demonstrated analytically that there exist Nash equilibrium effort levels within any group, but these are (1) Pareto-dominated by effort configurations that fail to be individually rational, and (2) dynamically unstable for sufficiently large group size. The out-of-equilibrium dynamics are studied by an agent-based computational model. Individual firms grow and perish, there is perpetual adaptation and change at the micro-level, and the composition of each firm at any instant is path-dependent. However, at the aggregate-level stationary firm size, growth rate and lifetime distributions emerge. These are compared to data on U.S. firms. In particular, the power law character of empirical firm size distributions is reproduced by the model. Log growth rates are distributed as a double exponential distribution, while the standard deviation in growth rates scales (decreases) with firm size, both in agreement with recent empirical analyses. Constant returns obtain at the aggregate level, in contrast to the increasing returns of the micro-level. A portrait of this agents-within-firms economy is developed by analyzing typical firm life cycles, typical agent careers, and through cross-sectional analysis. The model parameterization is systematically investigated. Right-skewed size distributions are robust to a variety of alternative specifications of preferences, compensation, interaction structure, and bounded rationality. The role of residual claimants within firms is briefly explored. Finally, it is argued any theory of the firm based on microeconomic equilibrium is unlikely to explain the empirical data on firm sizes, growth rates, and related aggregate regularities.

To our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.

Paper provided by Santa Fe Institute in its series Working Papers with number 99-03-019.

in new window

Date of creation: Mar 1999
Handle: RePEc:wop:safiwp:99-03-019
Contact details of provider: Postal:
1399 Hyde Park Road, Santa Fe, New Mexico 87501

Web page:

More information through EDIRC

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:wop:safiwp:99-03-019. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Thomas Krichel)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.