The missing middle in developing countries revisited

Abstract

Purpose The purpose of this paper is to develop a dynamic model to understand the evolution of the firm size distribution in developing countries. Design/methodology/approach Evidence points to the existence of a “missing middle” in the size distribution of firms in developing countries. In the model presented in this paper, the bimodality arises because of agents optimally selecting into a traditional and a modern sector. The key parameter in this model is the mean level of knowledge in the economy. Findings For a low mean, the two sectors co-exist. As the mean rises, the size distribution converges from a bimodal to an unimodal distribution. Originality/value Unlike existing explanations, this model does not rely on frictions to generate the bimodality in size distribution.