# Prof. Xavier Gabaix's research on economic diversification

1 June 22, 2013 The Economist ![The Economist logo](/sites/default/files/styles/246w/public/assets/images/uat_025662.jpg?itok=1_MW1PTy)>

Excerpt from the [Economist](http://www.economist.com/news/finance-and-economics/21579808-fate-large-firms-helps-explain-economic-volatility-goliaths) -- "A 2011 paper by [Xavier Gabaix](http://www.stern.nyu.edu/faculty/bio/xavier-gabaix) of New York University explains how diversification works when firms are independent and their sizes follow a regular “bell-shaped” distribution. Imagine an economy where one firm produces everything: its volatility of earnings determines volatility in GDP. But as the number of firms grows GDP volatility shrinks, because firms’ shocks cancel out. With 100 firms, volatility falls to a tenth of the level in a one-firm economy; with 1m firms, it falls to a thousandth. Since there are more firms than this, company-specific shocks disappear."

[Read more](http://www.economist.com/news/finance-and-economics/21579808-fate-large-firms-helps-explain-economic-volatility-goliaths)