Understanding firm heterogeneity Our findings suggest that heterogeneity in firm attributes plays an important role in explaining economic performance, a role which is, however, masked in aggregate statistics. Given that this term is often neglected and poorly understood, we take further steps towards studying its determinants.
We start by presenting a number of novel facts about the cross-country and cross-industry variation in the dispersion of sales and other firm-level variables, computed separately for each country-industry-year triplet. We find that sales dispersion, measured by the variance of log sales, varies markedly across countries and industries, and has increased on average by 10% between 2002 and 2012. Quality dispersion shows similar patterns, while price dispersion is relatively small, exhibits a low cross-sectional variation, and has remained stable over time. We then study how heterogeneity varies with country characteristics. We find that measures of market size – namely, GDP per capita, population, and distance from the US – are on average associated with a higher dispersion of sales and firm attributes, especially due to heterogeneity in quality. Hence, contrary to a widespread belief, our results show that firms from richer countries are more unequal.
Next, we ask whether these results are driven by superstar firms, which are known to dominate trade volumes. We do find that the incidence of such firms is also positively correlated with measures of market size. Yet, the correlation between the heterogeneity term and market size is not driven by superstar firms, as it holds even when they are removed from the sample. To further explore the role of exceptional firms, we impose additional theoretical restrictions. Assuming that attributes follow log-normal distributions, with parameters that can differ across countries and sectors, we develop a novel decomposition that separates the role of heterogeneity (i.e. smooth variation in attributes across a large number of firms), from that of granularity (i.e. exceptional performance in a small sample). Surprisingly, we find once again that although top firms are quantitatively important, granularity explains only about 5% of the observed variation in sales across countries and sectors.
Quantitative implications and conclusionsBesides playing an important role in explaining sales, does firm heterogeneity also matter for welfare? To address this question, we show that when attributes are log-normally distributed, the effect of firm heterogeneity on prices and welfare is a function of the variance of log sales. We then use this simple and easy-to-measure statistic to quantify the effect of changes in heterogeneity on price indexes. In particular, we show that lowering the variance of log sales by one standard deviation below the observed average implies a 40% increase in the price index of exporting firms. Moreover, the average increase in heterogeneity observed between 2002 and 2012 implies a 3% reduction in the price index in the average sector and country of origin.
Our results have important implications. From a policy perspective, they point towards an underexplored benefit of market size – larger markets host more diverse firms and seem to be a more fertile ground for superstars. From a theoretical perspective, our results confirm that product differentiation, varieties, and heterogeneity in quality are essential features to explain the data. Besides confirming the importance of firm heterogeneity, as in Melitz (2003), our results underscore the need for modelling differences in the distribution of attributes. They also beg the question of what mechanism might be generating them. Some possibilities include differences in the process of innovation (e.g. Bonfiglioli et al. 2018a, 2018b) and imitation (e.g. König et al. 2016), or in sorting patterns between firms, suppliers, and workers (e.g. Bonfiglioli and Gancia 2018, Sampson 2014). While identifying the exact mechanism that explains the distribution of attributes across firms is still an open challenge, our work has identified a set of empirical observations that successful theories should match.
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Bonfiglioli, A, R Crinò and G Gancia (2018a), "Betting on exports: Trade and endogenous heterogeneity", Economic Journal 128: 612--651.
Bonfiglioli, A, R Crinò and G Gancia (2018b), "Trade, finance and endogenous heterogeneity", Journal of the European Economic Association, forthcoming.
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