R&D Behaviour and the Emergence of Fat-Tailed Firm Size Distributions

Zakaria Babutsidze


Abstract 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