Firm Entry and Exit with Unbounded Productivity Growth

Abstract: In Hopenhayn's (1992) entry-exit model productivity is bounded, implying that the predicted firm size distribution cannot match the power law tail observable in the data. In this paper we remove the boundedness assumption and, in this more general setting, provide an exact characterization of existence of stationary equilibria, as well as a novel sufficient condition for existence based on treating production as a Lyapunov function. We also provide new representations of the rate of entry and aggregate supply. Finally, we prove that the firm size distribution has a power law tail under a very broad set of productivity growth specifications.