On the mechanics of firm growth

Given a common technology for replicating blueprints, high-quality blueprints will be replicated more quickly than low-quality blueprints. If quality begets quality, and firms are identifed with collections of blueprints derived from the same initial blueprint, then, along a balanced growth path, Gibrat’s Law holds for every type of firm. A firm size distribution with the thick right tail observed in the data can then arise only when the number of blueprints in the economy grows over time, or else firms cannot grow at a positive rate on average. But when calibrated to match the observed firm entry rate and the right tail of the size distribution, this model implies that the median age among firms with more than 10,000 employees is about 750 years. The problem is Gibrat’s Law. If the relative quality of a firm’s blueprints depreciates as the firm ages, then the firm’s growth rate slows down over time. By allowing for rapid and noisy initial growth, this version of the model can explain high observed entry rates, a thick-tailed size distribution, and the relatively young age of large U.S. corporations.Business conditions

Models of firm heterogeneity and growth

Although employment at individual firms tends to be highly non-stationary, the employment size distribution of all firms in the United States appears to be stationary. It closely resembles a Pareto distribution. There is a lot of entry and exit, mostly of small firms. This paper surveys general equilibrium models that can be used to interpret these facts and explores the role of innovation by new and incumbent firms in determining aggregate growth. The existence of a balanced growth path with a stationary employment size distribution depends crucially on assumptions made about the cost of entry. Some type of labor must be an essential input in setting up new firms.Productivity

On the Mechanics of Firm Growth

When the rate at which any given blueprint can be replicated is subject to decreasing returns, it is optimal to replicate high-quality blueprints more quickly than low-quality blueprints. The cost of introducing high-quality “start-up” blueprints will also rise with the rate at which they are introduced, and so low-quality blueprints will continue to enter the population. This naturally leads to persistent heterogeneity in blueprint quality. If quality begets quality and firms are identified with collections of blueprints derived from the same initial blueprint, then firms grow at a constant mean rate along the balanced growth path. A firm size distribution with the thick right tail observed in the data can then arise only when the number of blueprints in the economy grows over time. When calibrated to match the firm entry rate and the right tail of the size distribution, a homogeneous quality version of this model implies that the median age among firms with more than 10,000 employees is about 750 years. If the relative quality of a firm’s blueprints depreciates over time, then firm growth rates are not constant but slow down with age. If the successful replication of new blueprints is rapid but noisy, and high relative quality is sufficiently persistent, this version of the model can explain high observed entry rates, the thick-tailed size distribution, and the relatively young age of large U.S. corporations.firm size, productivity, replication

Measuring poverty dynammics and inequality in transition economies - disentangling real events from noisy data

The author uses instrumental variable methods, and the decomposition of income into transitory and persistent components to distinguish underlying income inequality and changes in poverty from the effects attributable to measurement error or transitory shocks. He applies this methodology to household-level panel data for Russia and Poland in the mid-1990s. The author finds that: 1) Accounting for noise in the data reduces inequality (as measured by the Gini coefficient) by 10-45 percent. 2) Individuals in both countries face much economic insecurity. The median absolute annual change in income or spending is about fifty percent in Russia, and about 20 percent in Poland. But roughly half of these fluctuations reflect measurement error or transitory shocks, so underlying levels of income, and spending are much more stable than the data suggest. 3) The apparent high levels of economic mobility are driven largely by transitory events and noisy data. After transitory shocks are accounted for, about eighty percent of the poor in both Russia and Poland remain in poverty for at least one year. So there is a real risk of an entrenched underclass emerging in these transition economies.Inequality,Governance Indicators,Economic Theory&Research,Poverty Diagnostics,Environmental Economics&Policies

Growth with a Fixed Factor

Consider an economy in which a fi…xed supply of unskilled labor can be combined with knowledge capital to produce consumption. The technology for accumulating knowledge capital is linear in knowledge capital. This leads to long-term growth if the production function for consumption goods is approximately Cobb-Douglas for large values of the stock of knowledge capital. The quality-ladder economy of Boldrin and Levine [2010] generates a menu of Leontief technologies with this feature. If the initial capital stock is low, there can be a long period of stagnation before unskilled wages start to grow, as in Lewis [1954]. A small open economy with a sufficiently low initial capital stock will run a trade surplus during its initial stages of development.economic growth, aggregate productivity

Models of Growth and Firm Heterogeneity

Although employment at individual firms tends to be highly non-stationary, the employment size distribution of all firms in the United States appears to be stationary. It closely resembles a Pareto distribution. There is a lot of entry and exit, mostly of small firms. This paper surveys general equilibrium models that can be used to interpret these facts and explores the role of innovation by new and incumbent firms in determining aggregate growth. The existence of a balanced growth path with a stationary employment size distribution depends crucially on assumptions made about the cost of entry. Some type of labor must be an essential input in setting up new firms.firm size distribution, organization capital, heterogeneous productivity, selection.

New goods and the size distribution of firms

This paper describes a simple model of aggregate and firm growth based on the introduction of new goods. An incumbent firm can combine labor with blueprints for goods it already produces to develop new blueprints. Every worker in the economy is also a potential entrepreneur who can design a new blueprint from scratch and set up a new firm. The implied firm size distribution closely matches the fat tail observed in the data when the marginal entrepreneur is far out in the tail of the entrepreneurial skill distribution. The model produces a variance of firm growth that declines with size. But the decline is more rapid than suggested by the evidence. The model also predicts a new-firm entry rate equal to only 2.5% per annum, instead of the observed rate of 10% in U.S. data.Production (Economic theory)