Towards an explanation of the exponential distribution of firm growth rates.

A robust feature of the corporate growth process is the exponential distribution of firm growth rates. This striking empirical regularity has been found to hold for a number of different datasets and at different levels of aggregation. In this paper, we propose a simple theoretical model capable of explaining this observed exponential distribution. We do not attempt to generalize on where growth opportunities come from, but rather we focus on how firms build upon growth opportunities. We borrow ideas from the self-organizing criticality literature to explain how the interdependent nature of discrete resources may lead to the triggering off a series of additions to a firm's resources. In a formal model we consider the case of employment growth in a hierarchy, and observe that growth rates follow an exponential distribution.