Firms as Bundles of Discrete Resources – Towards an Explanation of the Exponential Distribution of Firm Growth Rates

Abstract:     
A robust feature of the corporate growth process is the Laplace, or symmetric exponential, distribution of firm growth rates. In this paper, we sketch out a class of simple theoretical models capable of explaining this empirical regularity. We do not attempt to generalize on where growth opportunities come from, but rather we focus on how firms build upon growth opportunities. We base ourselves on Penrose's (1959) description of firm growth to explain how the interdependent nature of discrete resources may lead to the triggering off of a series of additions to a firm's resources. In a first formal model, we consider the case of employment growth in a hierarchy, and observe that growth rates follow an exponential distribution. In a second model, we include plant and capital as resources and we are able to reproduce a number of stylized facts about firm growth.

Number of Pages in PDF File: 21

Accepted Paper Series