Learning and Firm Dynamics in a Stochastic Equilibrium

Abstract

Imperfect information and individual firm learning affect the cross-sectional firm size distribution and matters for social welfare and aggregate fluctuations. This paper finds a tractable setup to study firm entry, exit, growth, and distribution with heterogeneity in firm beliefs and aggregate uncertainty. A firm learns about its unknown profitability (type) over time. Aggregate uncertainty affects firms' beliefs about individual types. Firm learning results in a Pareto right tail in cross-sectional firm belief distribution, thereby shaping the firm size distribution. When firm value and household welfare are misaligned, slow learning brings additional welfare loss relative to the constrained efficiency under imperfect information. With aggregate uncertainty, transitory shocks have persistent impacts due to the learning mechanism's hangover effect.