Economic growth and the rise of large firms

Economic growth and the rise of large firms

The disparity in the size distribution of business firms between rich and poor countries has long been a subject of interest among economists. Recent research by Zhang Chen sheds light on how economic development influences the structure of firm sizes, both within countries over time and across different nations. Chen's study, which will be published in Econometrica, presents a novel model that explains the systematic thickening of the right tail of the firm size distribution as economies grow.

Chen's research builds on Gibrat's law, which states that the growth rate of firms is constant and independent of their size. However, the author's model goes beyond this by incorporating both endogenous growth and an endogenous firm size distribution. The economy in the model features an asymptotic balanced growth path, meaning that it eventually stabilizes at a steady state. Along the transition to this balanced state, Gibrat's law holds at each point in time, but the right tail of the firm size distribution becomes progressively thicker.

This thickening of the right tail indicates that the proportion of large firms in the economy increases as it develops. Over time, the firm size distribution converges to Zipf's distribution, which is characterized by a power-law relationship between the number of firms and their size. This finding has significant implications for understanding the dynamics of economic growth and the role of large firms in driving it.

Chen's model also highlights the potential welfare implications of policies that favor large firms. The author argues that such policies can be beneficial due to the externality associated with idea search. In the model, large firms are more likely to engage in idea search, which can lead to spillover effects that benefit smaller firms and the overall economy. This suggests that supportive policies for large firms may not only be beneficial for their owners but also for society as a whole.

The researcher further extends the results obtained in the simple model to a general class of idea search models. Under common functional form assumptions, Chen's model stands out as the only one within this class that is consistent with both Gibrat's law and a thickening right tail in the firm size distribution. This makes it a valuable tool for economists studying the relationship between economic growth and firm size dynamics.

In conclusion, Chen's study provides a compelling explanation for the observed thickening of the right tail of the firm size distribution as economies develop. By incorporating endogenous growth and idea search, the model not only accounts for the empirical evidence but also offers insights into the potential welfare benefits of policies that support large firms. As economies around the world continue to grow and evolve, understanding the role of large firms in this process will be crucial for shaping effective economic policies.