Firm Growth Through New Establishments
74 Pages Posted: 17 May 2019 Last revised: 5 Sep 2019
Date Written: April 1, 2019
This paper analyzes the distribution and growth of firm-level employment along two margins: the extensive margin (the number of establishments in a firm) and the intensive margin (the number of workers per establishment in a firm). We utilize administrative datasets to document the behavior of these two margins in relation to changes in the U.S. firm size distribution. In the cross section, we find that the firm size distribution, as well as both extensive and intensive margins, exhibits a fat tail. The increase in average firm size between 1990 and 2014 are primarily driven by an expansion along the extensive margin, particularly in very large firms. We develop a tractable general equilibrium growth model with two types of innovations: external and internal. External innovation leads to the extensive margin of firm growth and internal innovation leads to the intensive margin growth. The model generates fat-tailed distributions in firm size, establishment size, and the number of establishments per firm. We estimate the model to uncover the fundamental forces that have caused the distributional changes from 1995 to 2014. We find that the change in the external innovation cost and the decline in establishment exit rates are the largest contributors to the increase in the number of establishment per firm.
Keywords: firm growth, firm size distribution, establishment, innovation
JEL Classification: E24, J21, L11, O31
Suggested Citation: Suggested Citation