Research Database

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.

This paper briefly recounts several of the key financial developments of 1974, describes the contingency planning exercise developed by the Minneapolis Federal Reserve Bank to encourage planning by large member banks, and then discusses some of the comments received in a trial run. The Appendix contains a copy of the exercise together with an illustrative example.

We use a model of pure, intertemporal exchange with spatially and information-ally separated markets to explain the existence of private securities which circulate and, hence, play a prominent role in exchange. The model, which utilizes a perfect foresight equilibrium concept, implies that a Schelling-type coordination problem can arise. It can happen that the amounts of circulating securities that are required to support an equilibrium and that are issued at the same time in informationally separated markets must satisfy restrictions not implied by individual maximization and market clearing in each market separately.

Previous work on discrete time portfolio selection models encompassed (a) transaction's costs, and (b) uncertainty about cash flows during the first (and only) period. This paper extends these models by considering uncertainty about asset yields in the second period and the optimal strategy for portfolio selection over a two-period horizon. Among the implications are i) the optimal initial portfolio is, in general, diversified and contains more short-term assets than the myopic investor's portfolio, and ii) the shape of the mean-variance locus ensures diversification for all (two-moment) types of investors, except certain forms of risk lovers. Other partial derivatives are investigated.

Most firms begin very small, and large firms are the result of typically decades of persistent growth. This growth can be understood as the result of some form of capital accumulation-organization capital. In the US, the distribution of firm size k has a right tail only slightly thinner than 1/k. This means that most capital accumulation must be accounted for by incumbent firms. This paper describes a range of circumstances in which this implies aggregate convergence rates that are only about half of what they are in the standard Cass-Koopmans economy. Through the lens of the models described in this paper, the aftermath of the Great Recession of 2008 is unsurprising if the events of late 2008 and early 2009 are interpreted as a destruction of organization capital.