Inequality, Incomplete Contracts, and the Size Distribution of Business Firms

30 Pages Posted: 26 May 2010

See all articles by Thomas Gall

Thomas Gall

University of Southampton - Division of Economics

Abstract

This article analyzes the effects of intrafirm bargaining on the formation of firms in an economy with imperfect capital markets and contracting constraints. In equilibrium, wealth inequality induces a heterogeneous distribution of firm sizes, allowing for firms both too small and too large in terms of technical efficiency. The findings connect well to empirical facts such as the missing middle of firm-size distributions in developing countries. The model can encompass a nonmonotonic relationship between aggregate output and inequality. It turns out that an inflow of capital may indeed decrease output in absolute terms.

Suggested Citation

Gall, Thomas, Inequality, Incomplete Contracts, and the Size Distribution of Business Firms. International Economic Review, Vol. 51, Issue 2, pp. 335-364, May 2010, Available at SSRN: https://ssrn.com/abstract=1611951 or http://dx.doi.org/10.1111/j.1468-2354.2010.00582.x

Thomas Gall (Contact Author)

University of Southampton - Division of Economics ( email )

Southampton, SO17 1BJ
United Kingdom

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