Creator: Luttmer, Erzo G. J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 696 Abstract:
This paper presents a simple formula that relates the tail index of the firm size distribution to the aggregate speed with which an economy converges to its balanced growth path. The fact that there are so many firms in the right tail implies that aggregate shocks that permanently destroy employment among incumbent firms, rather than cause these firms to scale back temporarily, are followed by slow recoveries. This is true despite the presence of many rapidly growing firms. Aggregate convergence rates are non-linear: they can be very high for economies far below the balanced growth path and very low for advanced economies.
Keyword: Recessions, Firm growth, Firm size distribution, and Recoveries Subject (JEL): L10 - Market Structure, Firm Strategy, and Market Performance: General and E10 - General Aggregative Models: General
Creator: Klette, Tor Jakob and Kortum, Samuel Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 300 Abstract:
We develop a parsimonious model of innovating firms rich enough to confront firm-level evidence. It captures the dynamic behavior of individual heterogenous firms, describes the evolution of an industry with simultaneous entry and exit, and delivers a general equilibrium model of technological change. While unifying the theoretical analysis of firms, industries, and the aggregate economy, the model yields insights into empirical work on innovating firms. It accounts for the persistence over time of firms’ R&D investment, the concentration of R&D among incumbent firms, and the link between R&D and patenting. Furthermore, it explains why R&D as a fraction of revenues is strongly related to firm productivity yet largely unrelated to firm size or growth.
Keyword: Birth and death processes, Productivity, Market structure, Firm growth, Endogenous growth theory, and R&D Subject (JEL): O31 - Innovation and Invention: Processes and Incentives and L11 - Production, Pricing, and Market Structure; Size Distribution of Firms