English, Article, Journal or magazine article edition: On the mechanics of firm growth Erzo G.J. Luttmer

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Physical Description
  • preprint
Language
  • English

Edition details

Title
  • On the Mechanics of Firm Growth
Author
  • Erzo G.J. Luttmer
Physical Description
  • preprint
Notes
  • 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
  • RePEc:fip:fedmwp:657
  • 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
  • RePEc:min:wpaper:2007-4
Language
  • English
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