Working Paper: NBER ID: w11261
Authors: Esteban Rossi-Hansberg; Mark L.J. Wright
Abstract: Why do firm growth and exit rates decline with size? What determines the size distribution of firms? This paper presents a theory of firm dynamics that simultaneously rationalizes the basic facts on firm growth, exit, and size distributions. The theory emphasizes the accumulation of industry specific human capital in response to industry specific productivity shocks. The theory implies that firm growth and exit rates should decline faster with size, and the size distribution should have thinner tails, in sectors that use human capital less intensively, or correspondingly, physical capital more intensively. In line with the theory, we document substantial sectoral heterogeneity in US firm dynamics and firm size distributions, which is well explained by variation in physical capital intensities.
Keywords: No keywords provided
JEL Codes: E2; D2; L2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Physical capital share (D33) | Firm growth rates (L25) |
| Physical capital share (D33) | Exit rates (J63) |
| Firm size (L25) | Firm growth rates (L25) |
| Firm size (L25) | Exit rates (J63) |