Markets and the non-monotonic relation between productivity and establishment size

Abstract

A model of monopolistic competition is presented in which the relation between the productivity and input size of producers is non-monotonic and bell-shaped. The model predicts that markets matter and the average size of the producers is directly scaled by the size of the market. An indirect effect increases the cutoff productivity, making the bell narrower in larger markets or when the transportation cost falls. Empirical evidence from the concrete industry and a few other 4-digit industries supports the model’s predictions. The bell-shaped relation has especially important implications on how size distributions are formed across localized versus globalized market industries.