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Generalizing Gibrat Reasonable Stochastic Multiplicative Models of Firm Dynamics with Entry and Exit

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  • Matteo Richiardi

Abstract

Multiplicative models of firm dynamics ‘à la Gibrat’ have become a standard reference in industrial organization. However, some unpleasant properties of their implied dynamics – namely, their explosive or implosive behaviour (firm size and number collapsing to zero or increasing indefinitely) - have been given only very little attention. In this paper I investigate using simulations which modifications to the standard multiplicative model of firm dynamics lead to stable (and reasonable) distributions of firm size. I show that in order to obtain stable systems for a wide range of average growth rate, either heteroskedasticity in the growth rates has to be assumed, or entry and exit mechanisms included. In particular I show that combining the broad class of threshold entry mechanisms and the more restricted class of threshold exit mechanisms with overcapacity penalizing all firms (where entry and exit are determined with reference to an exogenously defined total capacity of the market), lead to stable distributions even in the case of growth rate homoskedasticity, given a non-zero minimum threshold for firm size.

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Bibliographic Info

Paper provided by LABORatorio R. Revelli, Centre for Employment Studies in its series LABORatorio R. Revelli Working Papers Series with number 21.

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Length: 27 pages
Date of creation: 2003
Date of revision:
Handle: RePEc:cca:wplabo:21

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Related research

Keywords: Firm growth; Gibrat’s Law; Entry; Exit; Simulation.;

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  1. Delmar, Frederic & Davidsson, Per & Gartner, William B., 2003. "Arriving at the high-growth firm," Journal of Business Venturing, Elsevier, vol. 18(2), pages 189-216, March.
  2. Geroski, Paul A & Samiei, Hossein & Urga, Giovanni, 1997. "Are Differences in Firm Size Transitory or Permanent?," CEPR Discussion Papers 1691, C.E.P.R. Discussion Papers.
  3. Cordoba, Juan, 2001. "Balanced City Growth and Zipf's Law," Working Papers 2002-03, Rice University, Department of Economics.
  4. Audretsch, D.B. & Klomp, L. & Thurik, A.R., 2002. "Gibrat's Law: are the services different?," ERIM Report Series Research in Management ERS-2002-04-STR, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
  5. L. A. N. Amaral & S. V. Buldyrev & S. Havlin & H. Leschhorn & P. Maass & M. A. Salinger & H. E. Stanley & M. H. R. Stanley, 1997. "Scaling behavior in economics: I. Empirical results for company growth," Papers cond-mat/9702082, arXiv.org.
  6. José Fariñas & Lourdes Moreno, 2000. "Firms' Growth, Size and Age: A Nonparametric Approach," Review of Industrial Organization, Springer, vol. 17(3), pages 249-265, November.
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