Firm Size Distribution in Oblivious Equilibrium Model with Quality Ladder
In this article, we investigate a simulated firm size distribution in the model of Weintraub, Benkard, and Van Roy (Operations Research, 2010) which is a oblivious equilibrium (OE) model with a canonical quality ladder setting of Pakes and McGuire (Rand Journal of Economics, 1994). In previous research, validity of applying an OE model in a specific context have been assessed in two aspects: (i) how precisely the OE could replicate the MPE outcomes (light-tail condition); and (ii) whether restricting agents’ information (so does strategy) could be reasonable. In contrast, we propose a new criterion for the validity of OE models: whether equilibria could replicate power law of firm size distribution that is typically observed in real world data. We find that, as the quality depreciation probability or the investment cost becomes higher, the distribution comes closes to power law. On the other hand, the entry cost have virtually no impacts on the curvature of log-log plots.
KeywordsFirm size distribution Oblivious equilibrium Industry dynamics
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