Firm Size Dynamics in the Aggregate Economy ∗

Why do firm growth and exit rates decline with size? What determines the size distribution of firms? This paper presents a theory of firm dynamics that simultaneously rationalizes the basic facts on firm growth, exit, and size distributions. The theory emphasizes the accumulation of industry specific factors in response to industry specific productivity shocks. The emphasis on the accumulation and allocation of specific factors implies that firm growth and exit rates should decline faster with size in sectors that use specific factors intensively. This relationship is reflected in the size distribution of firms. In line with the theory we document substantial sectoral heterogeneity in US firm dynamics and firm size distributions, which is well explained by factor intensities.