TY - JOUR
T1 - On the mechanics of firm growth
AU - Luttmer, Erzo G.J.
PY - 2011/7
Y1 - 2011/7
N2 - The Pareto-like tail of the size distribution of firms can arise from random growth of productivity or stochastic accumulation of capital. If the shocks that give rise to firm growth are perfectly correlated within a firm, then the growth rates of small and large firms are equally volatile, contrary to what is found in the data. If firm growth is the result of many independent shocks within a firm, it can take hundreds of years for a few large firms to emerge. This paper describes an economy with both types of shocks that can account for the thick-tailed firm size distribution, high entry and exit rates, and the relatively young age of large firms. The economy is one in which aggregate growth is driven by the creation of new products by both new and incumbent firms. Some new firms have better ideas than others and choose to implement those ideas at a more rapid pace. Eventually, such firms slow down when the quality of their ideas reverts to the mean. As in the data, average growth rates in a cross section of firms will appear to be independent of firm size, for all but the smallest firms.
AB - The Pareto-like tail of the size distribution of firms can arise from random growth of productivity or stochastic accumulation of capital. If the shocks that give rise to firm growth are perfectly correlated within a firm, then the growth rates of small and large firms are equally volatile, contrary to what is found in the data. If firm growth is the result of many independent shocks within a firm, it can take hundreds of years for a few large firms to emerge. This paper describes an economy with both types of shocks that can account for the thick-tailed firm size distribution, high entry and exit rates, and the relatively young age of large firms. The economy is one in which aggregate growth is driven by the creation of new products by both new and incumbent firms. Some new firms have better ideas than others and choose to implement those ideas at a more rapid pace. Eventually, such firms slow down when the quality of their ideas reverts to the mean. As in the data, average growth rates in a cross section of firms will appear to be independent of firm size, for all but the smallest firms.
KW - Aggregate growth
KW - Firm size distribution
KW - Gibrat's law
UR - http://www.scopus.com/inward/record.url?scp=84255182013&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=84255182013&partnerID=8YFLogxK
U2 - 10.1093/restud/rdq028
DO - 10.1093/restud/rdq028
M3 - Article
AN - SCOPUS:84255182013
SN - 0034-6527
VL - 78
SP - 1042
EP - 1068
JO - Review of Economic Studies
JF - Review of Economic Studies
IS - 3
ER -