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Working Papers

April 1999, No. 99-3

Firm-Specific Learning and the Investment Behavior of Large and Small Firms

Wenli Li and John A. Weinberg

We examine a model of the size distribution and growth of firms whereby firms learn about idiosyncratic productivity parameters. Aggregate shocks, by adding noise to learning at the firm level, can produce differentiated response across firms with their reactions depending on the position of the firms in their individual life cycle. In particular, young firms, which are smaller on average than older firms, can 'overreact' to aggregate shocks. Such differences across firm sizes and ages, which arise here in a model with perfect financial markets, are often attributed to financial frictions that to financial frictions that hit small and large firms differently.

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