On the Mechanics of Firm Growth

Federal Reserve Bank of Minneapolis Staff Report No. 440

Posted: 30 Mar 2010 Last revised: 2 Apr 2010

See all articles by Erzo G. J. Luttmer

Erzo G. J. Luttmer

University of Minnesota - Twin Cities - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: March 2, 2010

Abstract

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.

Keywords: Aggregate Growth, Firm Size Distribution, Gibrat's Law

JEL Classification: L1, O4

Suggested Citation

Luttmer, Erzo G. J., On the Mechanics of Firm Growth (March 2, 2010). Federal Reserve Bank of Minneapolis Staff Report No. 440, Available at SSRN: https://ssrn.com/abstract=1580135

Erzo G. J. Luttmer (Contact Author)

University of Minnesota - Twin Cities - Department of Economics ( email )

271 19th Avenue South
Minneapolis, MN 55455
United States
612-625-5054 (Phone)
612-624-0209 (Fax)

HOME PAGE: http://www.econ.umn.edu/~luttmer

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
508
PlumX Metrics