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A Model of Growth Based on Knowledge Diffusion Within Firms

Staley, Mark (2015): A Model of Growth Based on Knowledge Diffusion Within Firms.

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A model of economic growth is presented in which firm productivity is encoded in manager's knowledge. Knowledge is subject to random shocks and is transmitted to some workers, who then become managers. Some managers start their own firms. In the competition for labor, the most productive firms are favored, so average productivity grows over time. The model predicts that the firm-size distribution rapidly converges to a Pareto distribution with exponent close to one, as seen by researchers looking at firm-size data. The model also predicts the existence of ``gazelles'': firms that grow rapidly from birth, gradually decelerating as they become large. Finally, the model predicts a scale effect that is strong in small economies but very weak in large economies.

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