Selection, Growth, and the Size Distribution of Firms

Abstract

This paper describes an analytically tractable model of balanced growth that is consistent with the observed size distribution of Þrms. Growth is the result of idiosyncratic Þrm productivity improvements, selection of successful Þrms, and imitation by entrants. Selection tends to improve aggregate productivity at a fast rate if entry and imitation are easy. The empirical phenomenon of Zipfs law can be interpreted to mean that entry costs are high or that imitation is difficult, or both. The small size of entrants indicates that imitation must be difficult. A calibration based on U.S. data suggests that about half of output growth can be attributed to selection. But the implied variance of the combined preference and technology shocks is puzzlingly high. ∗The views expressed herein are those of the author and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. I thank Michele Boldrin, Jonathan Eaton, Xavier