Econometrica: May, 1982, Volume 50, Issue 3

Selection and the Evolution of Industry

https://doi.org/0012-9682(198205)50:3<649:SATEOI>2.0.CO;2-O
p. 649-670

Boyan Jovanovic

Recent evidence shows that within an industry, smaller firms grow faster and are more likely to fail than large firms. This paper provides a theory of selection with incomplete information that is consistent with these and other findings. Firms learn about their efficiency as they operate in the industry. The efficient grow and survive; the inefficient decline and fail. A perfect foresight equilibrium is proved by means of showing that it is a unique maximum to discounted net surplus. The maximization problem is not standard, and some mathematical results might be of independent interest.