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Why Do Risky Sectors Grow Fast?

Author

Listed:
  • Jean Imbs

    (Paris School of Economics)

  • Basile Grassi

    (University of Oxford)

Abstract

Why do risky sectors grow fast? Because they have good ideas. In an idea flow growth model that nests the granular hypothesis (Gabaix 2011), we show that the fatness of the firm size distribution is positively related to both growth and volatility. A fat tailed distribution enhances the diffusion of ideas and increases growth in the long run. At the same time, a fat tail reduces the extent to which firm-level disturbances average out, and thus increases volatility. We show these correlations find support in US firm-level data: on average, sectors with fat tails grow fast and display high volatility. Interestingly, the relation between sector-level tail and volatility also holds in the short run, within sector. In the US, the dispersion in estimated tails can explain about 40% of the link between growth and volatility.

Suggested Citation

  • Jean Imbs & Basile Grassi, 2015. "Why Do Risky Sectors Grow Fast?," 2015 Meeting Papers 449, Society for Economic Dynamics.
    • Handle: RePEc:red:sed015:449
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    References listed on IDEAS

    as
    1. Vasco M. Carvalho & Basile Grassi, 2019. "Large Firm Dynamics and the Business Cycle," American Economic Review, American Economic Association, vol. 109(4), pages 1375-1425, April.
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    1. Jess Benhabib & Jesse Perla & Christopher Tonetti, 2021. "Reconciling Models of Diffusion and Innovation: A Theory of the Productivity Distribution and Technology Frontier," Econometrica, Econometric Society, vol. 89(5), pages 2261-2301, September.

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