Room 1.33 EEG UMinho & Online
Aggregate cyclicality has been shown to depend on the behavior of large firms, or heavy tails. However, it is not only the firm size distribution that exhibits heavy tails. Using Portuguese census data we show that growth rates have: (i) heavy tails; (ii) volatility decreasing with size and; (iii) kurtosis increasing with size. The last fact is particularly important as the large kurtosis correlates well with GDP. We then show how the findings can be explained both qualitatively and quantitatively. To do this we introduce consumer heterogeneity into a CES-demand model. Larger firms diversify their sales risk by selling to more customers. However, customer concentration limits diversification and increases tail risks. This explains the stronger responsiveness of small firms and the heavier tails for larger firms.
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