A Unified Theory of Firm Selection and Growth
This paper studies the effects of marketing choice to firm growth. I assume that firm-level growth is the result of idiosyncratic productivity improvements with continuous arrival of new potential producers. A firm enters a market if it is profitable to incur the marginal cost to reach the first consumer and pays an increasing marketing cost to reach additional consumers. The model is calibrated using data on the cross-section of firms and their sales across markets as well as the rate of incumbent firm-exit. The calibrated model quantitatively predicts firm exit, growth, and the resulting firm size distribution in the US manufacturing data. It also predicts a distribution of firm growth rates that deviates from Gibrat's law -i.e. independence of firm size and growth- in a manner consistent with the data.
I am grateful to Timothy Kehoe, Samuel Kortum, Cristina Arellano, Jonathan Eaton as well as Giuseppe Moscarini for their insightful comments and discussions on the topic. I am also indebted to Marc Muendler for providing me with moments from the Brazilian data and Jose Mata for providing me with the estimates for Portuguese firms. For their suggestions and comments, I would also like to thank Evangelia Chalioti, Fabian Lange, Erzo G.J. Luttmer, Anastasios Magdalinos, Ellen McGrattan, Luca Opromolla, Theodore Papageorgiou, Steve Redding, Andres Rodriguez-Clare, Larry Samuelson, Peter Schott, Adam Slawski, the members of the Trade workshop at Yale University and the Trade and Development workshop at the University of Minnesota, as well as various seminar and conference participants. Treb Allen and Olga Timoshenko provided outstanding research assistance. I gratefully acknowledge the support of the National Science Foundation under grant SES-0921673 and the CESifo foundation for the CESifo Young Affiliate Prize. All remaining errors are mine. This paper previously circulated under the title "Market Penetration Costs and Trade Dynamics" The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
Costas Arkolakis, 2016. "A Unified Theory of Firm Selection and Growth," The Quarterly Journal of Economics, vol 131(1), pages 89-155. citation courtesy of