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On the U.S. Firm and Establishment Size Distributions

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Abstract

This paper revisits the empirical evidence on the nature of firm and establishment size distributions in the United States using the Longitudinal Business Database (LBD), a confidential Census Bureau panel of all non-farm private firms and establishments with at least one employee. We establish five stylized facts that are relevant for the extent of granularity and the nature of growth in the U.S. economy: (1) with an estimated shape parameter significantly below 1, the best-fitting Pareto distribution substantially differs from Zipf's law for both firms and establishments; (2) a lognormal distribution fits both establishment and firm size distributions better than the commonly-used Pareto distribution, even far in the upper tail; (3) a convolution of lognormal and Pareto distributions fits both size distributions better than lognormal alone while also providing a better fit for the employment share distribution; (4) the estimated parameters are different across manufa cturing and services sectors, but the distribution fit ranking remains unchanged in the sectoral subsamples. Finally, using the Census of Manufactures (CM), we find that (5) the distribution of establishment-level total factor productivity---a common theoretical primitive for size---is also better described by lognormal than Pareto. We show that correctly characterizing the firm size distribution has first order implications for the effect of firm-level idiosyncratic shocks on aggregate activity.

Suggested Citation

  • Illenin O. Kondo & Logan T. Lewis & Andrea Stella, 2018. "On the U.S. Firm and Establishment Size Distributions," Finance and Economics Discussion Series 2018-075, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2018-75
    DOI: 10.17016/FEDS.2018.075
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    Cited by:

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    2. Dan Cao & Erick Sager & Henry Hyatt & Toshihiko Mukoyama, 2019. "Firm Growth through New Establishments," 2019 Meeting Papers 1484, Society for Economic Dynamics.
    3. Michele Fornino & Andrea Manera, 2022. "Automation and the Future of Work: Assessing the Role of Labor Flexibility," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 45, pages 282-321, July.
    4. Chang-Tai Hsieh & Nicholas Li & Ralph Ossa & Mu-Jeung Yang, 2022. "Gains from Trade Liberalization with Flexible Extensive Margin Adjustment," Working Papers 083, Toronto Metropolitan University, Department of Economics.

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    More about this item

    Keywords

    Firm size distribution; Granularity; Lognormal; Pareto; TFP distribution; Zipf's law;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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