Empirical Patterns of Firm Growth and R&D Investment: A QuUality LadderModel Interpretation

We present a model of endogenous firm growth with R&D investment and stochastic innovation as the engines of growth. The model for firm growth is a partial equilibrium model drawing on the quality ladder models in the macro growth literature, but also on the literature on patent races and the discrete choice models of product differentiation. We examine to what extent the assumptions and the empirical content of our model are consistent with the findings that have emerged from the empirical studies of growth, productivity, R&D and patenting at the firm level. The analysis shows that the model fits well with empirical patterns such as (i) a skewed size distribution of firms with persistent differences in firm sizes, (ii) firm growth independent of firm size, as stated in the so-called Gibrat's law, and (iii) R&D investment proportional to sales, as well as a number of other empirical patterns.