Small Firms in Economic Theory
This paper is a survey of the theories of the determinants of firm size and the distribution of firm sizes, with a special emphasis on small firms. The diverse literature surveyed here is classified into four approaches. The first is the conventional microeconomic approach (or the technological approach) in which firm size is determined by technical and allocational efficiency. The second is the transaction cost approach (or the institutional approach) in which firm size is determined by transaction cost efficiency. The third is the industrial organisation approach in which firm size and its distribution (market structure) are determined by market power. The fourth approach is that of the dynamic models of the size distribution of firms, including stochastic models, life-cycle models and evolutionary models. The concluding section summarises the implications of various theories for the study of the small firm sector.
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