The world economy and the world trade are dominated by extremely large firms. The distribution of firm size is well approximated by a power law with exponent close to -1, a phenomenon also known as Zipf's Law (Axtell, 2001). While the literature has sought to explore how Zipf's Law can arise, much less is known about its implications for the macroeconomy. This project has two parts. The first part will examine, theoretically and quantitatively, the implications of this firm size distribution for the production structure, income, welfare, and macroeconomic volatility. The same framework will also be used to evaluate the role of globalization and institutional reforms in welfare and macroeconomic volatility. The second part of the project will collect data on the largest firms in the world between 1974 and today from a unique data source that has not previously been used in economic analysis. This research will provide, for the first time, a firm-level view of the evolution of the global economy over the past three decades. Intellectual Merit Recent research in international trade and macroeconomics has emphasized, in both theory and empirics, the significant heterogeneity across firms, and stressed the need to look at the individual firms' decisions and outcomes. However, theoretically and quantitatively we have not fully come to grips with what the observed degree of heterogeneity implies for macroeconomic outcomes, such as welfare and aggregate fluctuations. Empirically, great progress has been made in understanding firm behavior using datasets for individual countries. However, very little is known about how firm size distributions compare across countries, and virtually nothing is known about how firm size distributions evolve over time in a wide sample of countries. This project would both improve our understanding of the empirical patterns of firm size distributions in a large sample of countries, and explore theoretical and quantitative implications of these patterns for the macroeconomy. Broader Impacts By focusing on the impact of individual firms on the aggregate outcomes, this project will shed light on what kinds of firms, and what kinds of international trade, should be the most important targets for policy. Preliminary analysis suggests, for instance, that the few large firms, and large export categories, matter far more for welfare than the multitude of small firms or small imports (one of the goals of this project is to make this statement quantitatively precise). This implies, among other things, that gains from deregulation are smaller, while gains from uniform tariff reductions are far larger, than was previously thought. In addition, this work provides an integrated view of the role of trade and economic institutions in explaining differences in levels of development across countries, offering guidance for the priorities of development policy. Finally, one of the results of this analysis is that increased trade integration may lead to greater macroeconomic volatility, which has implications for the social safety net and the design of international financial architecture.
