Globalization and Endogenous Firm Scope
42 Pages Posted: 7 Jun 2006
Date Written: June 3, 2006
We develop a theory of multiproduct firms to analyze the effects of globalization on the distributions of firm size, scope, and productivity. Our model explains two puzzles. First, it explains the well-known size-discount puzzle: large firms have lower values of Tobin's Q than small firms. Second, it explains the globalization-skewness puzzle documented in the empirical part of our paper: a multilateral reduction in trade costs leads to a flattening of the size distribution of firms. In our model, globalization not only affects the distribution of observed productivities but also productivity at the firm level.
Keywords: multiproduct firms, firm size distribution, trade liberalization, size discount, firm heterogeneity, productivity
JEL Classification: F12, F15, L11, L25
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