Firm Growth Through New Establishments

87 Pages Posted: 17 May 2019 Last revised: 1 May 2020

See all articles by Dan Cao

Dan Cao

Georgetown University - Department of Economics

Henry R. Hyatt

U.S. Census Bureau - Center for Economic Studies

Toshihiko Mukoyama

Georgetown University - Department of Economics; CIREQ

Erick Sager

Board of Governors of the Federal Reserve System

Date Written: February 1, 2017

Abstract

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 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 is 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 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 caused the distributional changes from 1995 to 2014. The largest contributors to the increase in the number of establishments per firm are the external innovation cost and the decline in establishment exit rate.

Keywords: firm growth, firm size distribution, establishment, innovation

JEL Classification: E24, J21, L11, O31

Suggested Citation

Cao, Dan and Hyatt, Henry R. and Mukoyama, Toshihiko and Sager, Erick, Firm Growth Through New Establishments (February 1, 2017). Available at SSRN: https://ssrn.com/abstract=3361451 or http://dx.doi.org/10.2139/ssrn.3361451

Dan Cao (Contact Author)

Georgetown University - Department of Economics ( email )

Washington, DC 20057
United States

Henry R. Hyatt

U.S. Census Bureau - Center for Economic Studies ( email )

4700 Silver Hill Road
Washington, DC 20233
United States

Toshihiko Mukoyama

Georgetown University - Department of Economics ( email )

Washington, DC 20057
United States

CIREQ

C.P. 6128, Succursale Centre-ville
Montreal, Quebec H3C 3J7
Canada

Erick Sager

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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