The added value of management skill in the explanation of the distribution of firm size

Abstract

The stochastic explanations of skewed distribution of firm size question the value added of management theories that trace differences in market share and profits of firms to strategy and organization choices, which are in turn linked to better entrepreneurial skills. This paper explains the distribution of firm size as the market equilibrium outcome of individual occupational choices of working as entrepreneurs or employees. The distribution of size and profit of firms in the equilibrium is directly related to the distribution of skills within the group of individuals who, in the same equilibrium, choose to work as entrepreneurs, restoring the importance of management choice in the performance of firms. The paper highlights the importance of having a theoretical model as guidance in the interpretation of regularities observed in the distribution of firm size, and the ability to distinguish between “resembling” and “true” power laws of such distributions.