Firm dynamics in a closed, conserved economy: A model of size distribution of employment and related statistics

TL;DR

This paper introduces a model of firm size distribution in a closed economy with zero-intelligence agents, successfully reproducing key statistical features like power-law size distribution and growth rate behaviors observed in empirical data.

Contribution

It generalizes kinetic exchange models to multi-agent interactions and provides exact results, offering a novel approach to modeling firm size distributions.

Findings

Reproduces power-law distribution of firm sizes

Growth rate fluctuations decrease with size following a power law

Model aligns with empirical statistical features of firm dynamics

Abstract

We address the issue of the distribution of firm size. To this end we propose a model of firms in a closed, conserved economy populated with zero-intelligence agents who continuously move from one firm to another. We then analyze the size distribution and related statistics obtained from the model. Our ultimate goal is to reproduce the well known statistical features obtained from the panel study of the firms i.e., the power law in size (in terms of income and/or employment), the Laplace distribution in the growth rates and the slowly declining standard deviation of the growth rates conditional on the firm size. First, we show that the model generalizes the usual kinetic exchange models with binary interaction to interactions between an arbitrary number of agents. When the number of interacting agents is in the order of the system itself, it is possible to decouple the model. We provide some exact results on the distributions. Our model easily reproduces the power law. The fluctuations in the growth rate falls with increasing size following a power law (with an exponent 1 whereas the data suggests that the exponent is around 1/6). However, the distribution of the difference of the firm-size in this model has Laplace distribution whereas the real data suggests that the difference of the log sizes has the same distribution.