Establishment Size Dynamics in the Aggregate Economy

50 Pages Posted: 25 Jul 2008 Last revised: 22 Apr 2009

See all articles by Esteban Rossi-Hansberg

Esteban Rossi-Hansberg

Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Mark L. J. Wright

Federal Reserve Banks - Federal Reserve Bank of Minneapolis

Date Written: November 1, 2006

Abstract

Why do growth and net exit rates of establishments decline with size? What determines the size distribution of establishments? This paper presents a theory of establishment dynamics that simultaneously rationalizes the basic facts on economy-wide establishment growth, net exit, and size distributions. The theory emphasizes the accumulation of industry-specific human capital in response to industry-specific productivity shocks. It predicts that establishment growth and net exit rates should decline faster with size and that the establishment size distribution should have thinner tails in sectors that use human capital less intensively or physical capital more intensively. In line with the theory, the data show substantial sectoral heterogeneity in U.S. establishment size dynamics and distributions, which is well explained by variation in physical capital intensity.

Keywords: Scale Effects, Establishment Dynamics, Size Distribution of Establishments, Zip's Law, Gibrat's Law

JEL Classification: E0, D92, L16, L25

Suggested Citation

Rossi-Hansberg, Esteban Alejandro and Wright, Mark L.J., Establishment Size Dynamics in the Aggregate Economy (November 1, 2006). Available at SSRN: https://ssrn.com/abstract=1172043 or http://dx.doi.org/10.2139/ssrn.1172043

Esteban Alejandro Rossi-Hansberg (Contact Author)

Princeton University - Department of Economics ( email )

Princeton, NJ
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Mark L.J. Wright

Federal Reserve Banks - Federal Reserve Bank of Minneapolis ( email )

90 Hennepin Avenue
Minneapolis, MN 55480
United States

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