GEORGE M. KATSIMBRIS University of Bridgeport STEPHEN M. MILLER University of Connecticut Distribution Effects and the Business Demand for Money* This paper examines whether and how changes in an industry’s firm-size distribution affect the per-firm demand for money. The size distribution of an industry potentially affects the demand for money through several channels. We examine four of those channels: 1) economies of scale; 2) decentralization in cash management; 3) cost of credit; and 4) compensating balances. We conclude that increasing the size inequality increases the industry’s per-firm demand for money. 1. Introduction The works of Baumol (1952) and Tobin (1956), hereafter referred to as B-T, generated intense interest in “inventory-theo- retic” models of the demand for money. At the theoretical level, the B-T model has been extended by 1) the introduction of decentralized cash management [see Sprenkle (1969)] ; 2) the intro- duction of the cost of credit [see Lewis (1974), Litzenberger (1971), Sastry, (1970) and (1971), and Wrightsman and Terniko (1971)J ; 3) the consideration of compensating balances [see Frost (1970), Hodgman (1961), and Sprenkle (1971)] ; 4) the inclusion of more than two assets [see Feige and Parkin (1971) ] ; 5) the inclusion of interest earnings in income [see Johnson (1970)] ; and 6) the introduction of stochastic elements [see Miller and Orr (1966) and Whalen (1966)]. On the empirical side, the presence of economies of scale in cash management and the interest-rate elasticity of transaction balances have received major attention. This paper focuses on the business demand for money. In Meltzer (1963), money demand was estimated for each of fourteen industries in each of nine years, using a sample stratified by asset-size class. Beginning with a money demand dependent on wealth, Meltzer derived that *This paper was developed from the first author’s dissertation. We would like to thank William F. Lott, William A. McEachern, and Anthony A. Romeo for their comments. The University of Connecticut Computer Center provided support for the econometric work. Journal of Macroeconomics, Fall 1980, Vol. 2, No. 4, pp. 287305 287 @ Wayne State University Press, 1980.