This paper describes an analytically tractable model of balanced growth that is consistent with the observed size distribution of firms. Growth is the result of idiosyncratic firm productivity improvements, selection of successful firms, and imitation by entrants. Selection tends to improve aggregate productivity at a fast rate if entry and imitation are easy. The empirical phenomenon of Zipf's law can be interpreted to mean that entry costs are high or that imitation is difficult, or both. The small size of entrants indicates that imitation must be difficult. A calibration based on U. S. data suggests that about half of output growth can be attributed to selection. But the implied variance of the combined preference and technology shocks is puzzlingly high. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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In this paper we provide econometric tools for the evaluation of intertemporal asset pricing models using specification-error and volatility bounds. We formulate analog estimators of these bounds, give conditions for consistency and derive the limiting distribution of these estimators. The analysis incorporates market frictions such as short-sale constraints and proportional transactions costs. Among several applications we show how to use the methods to assess specific asset pricing models and to provide nonparametric characterizations of asset pricing anomalies.