On the mechanics of firm growth

By Erzo G. J. Luttmer. 2011

211 citations recorded by the source corpus.

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.

Subfields: Economics and Econometrics

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In Economics and Econometrics

Citations in the corpus

Large risks, limited liability, and dynamic moral hazard (2010, background): “Substituting in (37), we obtain the following property.”
Models of Growth and Firm Heterogeneity (2010, unknown): “[56] Luttmer, E.”
Innovation by entrants and incumbents (2015, unknown): “See Luttmer (2010b) for a model with this feature. plants).”
The Gravity Equation in International Trade: An Explanation (2018, background): “The reason why average squared distances are simply added to each other can be seen from the law of mo- 14 See in particular the stochastic models in Gabaix (1999) or Luttmer (2011), which deliver endogenously an invariant size distribution that is close to Zipf ’s law.”
Efficient Firm Dynamics in a Frictional Labor Market (2015, unknown): “Luttmer (2011)).”
Multiple-Product Firms and Product Switching (2010, background): “Monahan (1991) and John Baldwin and Wulong Gu (2009). Dunne et al.”
Entrepreneurship and Financial Frictions: A Macrodevelopment Perspective (2015, unknown): “12 See also Moll (2014) for a theoretical analysis of this point. from many of the simplifying assumptions invoked in the above literature in order to yield tractable analytical results.”