Technology diffusion and growth

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Abstract

Suppose firms are subject to decreasing returns and permanent idiosyncratic productivity shocks. Suppose also firms can only stay in business by continuously paying a fixed cost. New firms can enter. Firms with a history of relatively good productivity shocks tend to survive and others are forced to exit. This paper identifies assumptions about entry that guarantee a stationary firm size distribution and lead to balanced growth. The range of technology diffusion mechanisms that can be considered is greatly expanded relative to Luttmer (2007) [21]. If entrants can make only small improvements over the technologies used by the least productive incumbents, then the firm size distribution approximates Zipf's law and entry and exit rates are high, as in the data.

Original languageEnglish (US)
Pages (from-to)602-622
Number of pages21
JournalJournal of Economic Theory
Volume147
Issue number2
DOIs
StatePublished - Mar 2012

Keywords

  • Diffusion
  • Imitation
  • Productivity
  • Selection

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