Why Do Risky Sectors Grow Fast?

Jean Imbs and Basile Grassi
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Basile Grassi: University of Oxford

No 449, 2015 Meeting Papers from Society for Economic Dynamics

Abstract: Why do risky sectors grow fast? Because they have good ideas. In an idea flow growth model that nests the granular hypothesis (Gabaix 2011), we show that the fatness of the firm size distribution is positively related to both growth and volatility. A fat tailed distribution enhances the diffusion of ideas and increases growth in the long run. At the same time, a fat tail reduces the extent to which firm-level disturbances average out, and thus increases volatility. We show these correlations find support in US firm-level data: on average, sectors with fat tails grow fast and display high volatility. Interestingly, the relation between sector-level tail and volatility also holds in the short run, within sector. In the US, the dispersion in estimated tails can explain about 40% of the link between growth and volatility.

Date: 2015
New Economics Papers: this item is included in nep-bec and nep-ger
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Working Paper: Why Risky Sectors Grow Fast (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed015:449

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