The Distribution of Firm Sizes from Occupational Choice: Theory and Empirical Implications

Abstract

This paper models the distribution of firm sizes as the market equilibrium from occupational choices made by rational individuals with different entrepreneurial skills. The model is calibrated to match Spanish data on the size of occupational groups (employees, employers, solo self-employed) and firms. Our results show how the distribution of skills, the production technology, and the internal organization of firms jointly determine the distribution of firm sizes and the operating efficiency of the whole economy. The analysis predicts a link between the truncated upper tail of the distribution of entrepreneurial skills in the population, and the observed skewed distribution of firm sizes, and explains the “missing middle” as a direct consequence of how firms’ class sizes are usually defined. Finally, the paper provides an explanation of the observed heterogeneity in the TFP of firms, arising from the heterogeneity of the skills of their respective entrepreneurs.