The Size Distribution of Business Firms

Examines the skewed distribution of firms by size. Discusses the adequacy of previous economic explanations regarding firm size that are based on the static cost curve. It is shown that the static cost curve for the firm may predict the minimum size of a firm in an industry with a known size value, but it will not predict the size distribution of firms. Therefore, an alternative theory of firm size based on a stochastic model of the growth process is proposed. It is postulated that size has no effect on the expected percentage of firm growth--i.e., that each firm in every size class has the same average chance of increasing or decreasing in size regardless of its current size. The empirical data from a transition matrix for the 500 largest U.S. industrial corporations from 1954 to 1956 show that the frequency distributions of percentage changes in size of small, medium, and large firms were similar. However, this data encompasses an entire economy rather than a single industry. In order to find the size distribution of firms by industry, Bain's estimates of minimum efficient plant size and the U.S. Census of Manufacturers data on the size distribution of plants are used to compare the minimum efficient scales suggested for several industries. The findings suggest that the stochastic model provides new ways of interpreting the data on firm size distribution, and any deviation from the results predicted by the model reflect some departure from the law of proportionate effect or from one of the other assumptions in the model. Concludes with implications for economic policy and further research. (SFL)