STEG Working Paper Series Research Theme 0: Data, Measurement, and Conceptual Framing, Research Theme 1: Firms, Frictions and Spillovers, and Industrial Policy

Economic Growth and the Rise of Large Firms

WP078_Chen_EconomicGrowthandtheRiseofLargeFirms_Chen_PhD_1503.pdf

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Rich and poor countries differ in the size distribution of business firms. This paper shows that the right tail of the firm size distribution systematically grows thicker with economic development, both within countries over time and across countries. The author develops a simple idea search model with both endogenous growth and an endogenous firm size distribution. The economy features an asymptotic balanced growth path. Along the transition, Gibrat’s law holds at each date, and the right tail of the firm size distribution becomes monotonically thicker. The firm size distribution converges to Zipf’s distribution. The model also implies that policies favouring large firms can improve welfare due to the externality associated with idea search. Finally, the author extends the results obtained in the simple model to a general class of idea search models. Under common functional form assumptions, this model stands out as the only model within that class that is consistent with both Gibrat’s law and a thickening right tail.

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