Innovation, Firm Efficiency, and Market Structure

Abstract: While numerous empirical studies have investigated whether efficiency is behind firm growth and industry market structure, there are few theoretical models underlying this work. We develop a theoretical model of endogenous firm growth that conforms to empirical regularities found in the literature and explicitly defines firm efficiency as the principal driver of firm growth and market structure. Estimating a stochastic frontier model with U.S. manufacturing firm data from the COMPUSTAT database, we find results consistent with the theoretical model. This model serves as a unified framework for additional theoretical and empirical work that explicitly incorporates both innovation and firm efficiency