A Unified Theory of Firm Selection and Growth

Abstract

This paper studies the effects of marketing choice to firm growth. I assume that firm-level growth is the result of idiosyncratic productivity improvements with continuous arrival of new potential producers. A firm enters a market if it is profitable to incur the marginal cost to reach the first consumer and pays an increasing marketing cost to reach additional consumers. The model is calibrated using data on the cross-section of firms and their sales across markets as well as the rate of incumbent firm-exit. The calibrated model quantitatively predicts firm exit, growth, and the resulting firm size distribution in the US manufacturing data. It also predicts a distribution of firm growth rates that deviates from Gibrat's law -i.e. independence of firm size and growth- in a manner consistent with the data.