Slow Convergence in Economies with Firm Heterogeneity

Federal Reserve Bank of Minneapolis Working Paper No. 696

29 Pages Posted: 21 Dec 2013

See all articles by Erzo G. J. Luttmer

Erzo G. J. Luttmer

University of Minnesota - Twin Cities - Department of Economics

Date Written: March 19, 2012

Abstract

This paper presents a simple formula that relates the tail index of the firm size distribution to the aggregate speed with which an economy converges to its balanced growth path. The fact that there are so many firms in the right tail implies that aggregate shocks that permanently destroy employment among incumbent firms, rather than cause these firms to scale back temporarily, are followed by slow recoveries. This is true despite the presence of many rapidly growing firms. Aggregate convergence rates are non-linear: they can be very high for economies far below the balanced growth path and very low for advanced economies.

Keywords: slow recoveries, size distribution of firms

JEL Classification: E1, O1

Suggested Citation

Luttmer, Erzo G. J., Slow Convergence in Economies with Firm Heterogeneity (March 19, 2012). Federal Reserve Bank of Minneapolis Working Paper No. 696, Available at SSRN: https://ssrn.com/abstract=2369891 or http://dx.doi.org/10.2139/ssrn.2369891

Erzo G. J. Luttmer (Contact Author)

University of Minnesota - Twin Cities - Department of Economics ( email )

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HOME PAGE: http://www.econ.umn.edu/~luttmer

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