INEQUALITY,INCOMPLETE CONTRACTS,AND THE SIZE DISTRIBUTION OF BUSINESS FIRMS* |
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| Authors: | Thomas Gall |
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| Institution: | 1. University of Bonn, Germany;2. I am grateful for many helpful comments to three anonymous referees, Stefan Behringer, Wouter Denhaan, Hans‐Peter Grüner, Seiichi Katayama, Felix Kübler, Benny Moldovanu, Andrew Newman, Stefan Niemann, Ingolf Schwarz, and Dezs? Szalay, and to seminar participants at Belfast, Mannheim, UCL, ESEM 2004, Vereinstagung 2004, and Bonn Matching Conference 2006. All remaining errors are, of course, my own. Part of this research was conducted at Mannheim University and University College London. I gratefully acknowledge financial support from DFG and the European Commission. Please address correspondence to: Thomas Gall, Economic Theory II, University of Bonn, Lennéstr. 37, 53113 Bonn, Germany. E‐mail: . |
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| Abstract: | This article analyzes the effects of intrafirm bargaining on the formation of firms in an economy with imperfect capital markets and contracting constraints. In equilibrium, wealth inequality induces a heterogeneous distribution of firm sizes, allowing for firms both too small and too large in terms of technical efficiency. The findings connect well to empirical facts such as the missing middle of firm‐size distributions in developing countries. The model can encompass a nonmonotonic relationship between aggregate output and inequality. It turns out that an inflow of capital may indeed decrease output in absolute terms. |
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