Firm size distribution under horizontal and vertical innovation

• Published in: Journal of evolutionary economics Vol. 23; no. 1; pp. 129 - 161
• Main Authors: Gil, Pedro Mazeda, Figueiredo, Fernanda
• Format: Journal Article
• Language: English
• Published: Berlin/Heidelberg Springer-Verlag 2013; Springer Nature B.V
• Subjects: Analysis; Asymptotic methods; Economic Growth; Economic theory; Economic Theory/Quantitative Economics/Mathematical Methods; Economics; Economics and Finance; Employment; Endogenous growth; Entrepreneurship; Evolutionary economics; Growth models; Innovation; Innovations; Institutional/Evolutionary Economics; Microeconomics; Monopolistic competition; Normal distribution; Organization theory; Poisson distribution; R & D/Technology Policy; R&D; Regular Article; Research & development; Research and development; Size of enterprise; Skewness; Studies; Firm size distribution; Endogenous growth; O38; Skewness; Heavy tails; Horizontal and vertical R&D; O41; L11
• ISSN: 0936-9937; 1432-1386
• DOI: 10.1007/s00191-011-0246-0

This paper studies the firm size distribution arising from an endogenous growth model of quality ladders with expanding variety. The probability distribution function of a given cohort is a Poisson distribution that converges asymptotically to a normal of log size. However, due to firm entry propelled by horizontal R&D, the
total 
distribution—i.e., when the entire population of firms is considered—is a mixture of overlapping Poisson distributions which is systematically right skewed and exhibits a fatter upper tail than the normal distribution of log size. Our theoretical results qualitatively match the empirical evidence found both for the cohort and the total distribution, and which has been presented as a challenge for theory to explain. Moreover, by obtaining a total distribution with a gradually increasing average over a long time span, the model is able to address complementary empirical evidence that points to a total distribution subtly evolving over time.