On the Mechanics of Firm Growth

Erzo Luttmer

No 2007-4, Working Papers from University of Minnesota, Department of Economics

Abstract: 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.

Keywords: firm size; productivity; replication (search for similar items in EconPapers)
JEL-codes: L1 O3 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2007-30-10, Revised 2007
New Economics Papers: this item is included in nep-bec and nep-ent
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://docs.google.com/a/umn.edu/viewer?a=v&pid=s ... ODRlYTk0MDJhMjJiZTA2 First version, 2007 (application/pdf)

Related works:
Journal Article: On the Mechanics of Firm Growth (2011)
Working Paper: On the mechanics of firm growth (2010)
Working Paper: On the mechanics of firm growth (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:min:wpaper:2007-4

Access Statistics for this paper

More papers in Working Papers from University of Minnesota, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Caty Bach ( this e-mail address is bad, please contact ).