UNU-MERIT Working Papers Series
R&D Behaviour and the Emergence of Fat-Tailed Firm Size Distributions
Zakaria Babutsidze #2009-056Abstract This paper presents a simple boundedly rational model of a rm
and consumer behaviour. We formulate an entry game, where every firm
decides on investing in R&D for inventing a new product that will appeal
to certain group of consumers. The success depends on the amount of
funds available for the project as well as rm's familiarity with the
relevant proportion of taste space. We identify the section of parameter
space where firms have an incentive to diversify. For these parameter
constellations the model results in rich industrial dynamics.
Equilibrium firm size distributions are heavy tailed and skewed to the
right. The heaviness of the tail depends on one industry-level
parameter.
Key Words: R&D . Product innovation . Market knowledge . Firm size
distribution
JEL codes: C72 . D21 . L11
UNU-MERIT Working Papers
ISSN 1871-9872
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