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Gibrat's Law and Market Selection

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  • Francesca Lotti
  • Marco Vivarelli

    ()

  • Enrico Santarelli

    ()

Abstract

According to Gibrat' Law of Proportionate Effect, the growth rate of a given firm is independent of its size at the beginning of the period examined. In contrast to the previous literature on the subject, this paper seeks to test the Law by taking account of both the entry process and the role of survival/failure in reshaping a given population of firms over time. It does so by focusing on the entire population of firms (including newborn ones) in the Italian Radio, TV & Telecommunications equipment industry and tracking them over seven years. Consistently with the previous literature, it finds that - in general - Gibrat' Law is to be rejected, since smaller firms tend to grow faster than their larger counterparts. However, the paper' main finding is that this rejection of Gibrat’ Law may be due to market dynamics and selection. In other words, it is due to the entry process and the presence of transient smaler firms. Indeed, whilst it is found that Gibrat' Law has to be rejected over a seven-year period during which both incumbent and newborn firms are considered, for both sub-populations of surviving firms a convergence towards Gibrat-like behavior over time can be detected. Thus, market selection "leans" the original population of firms and the resulting industrial "ore" (mature, larger, well-established and most efficient firms) does not seem to depart from a Gibrat-like patern of growth.

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Bibliographic Info

Paper provided by Max Planck Institute of Economics, Entrepreneurship, Growth and Public Policy Group in its series Papers on Entrepreneurship, Growth and Public Policy with number 2004-28.

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Length: 18 pages
Date of creation: Mar 2004
Date of revision:
Handle: RePEc:esi:egpdis:2004-28

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Keywords: Gibrat' Law; manufacturing; industrial dynamics; entry; survival; selection bias;

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References

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  1. Harhoff, Dietmar & Stahl, Konrad O. & Woywode, Michael, 1996. "Legal Form, Growth and Exit of West German Firms - Empirical Results for Manufacturing, Construction, Trade and Service Industries," CEPR Discussion Papers 1401, C.E.P.R. Discussion Papers.
  2. Cabral, Luís M B, 1997. "Entry Mistakes," CEPR Discussion Papers 1729, C.E.P.R. Discussion Papers.
  3. R. Piergiovanni & E. Santarelli & L. Klomp & A.R. Thurik, 2002. "Gibrat's Law and the Firm Size / Firm Growth Relationship in Italian Services," Tinbergen Institute Discussion Papers 02-080/3, Tinbergen Institute.
  4. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
  5. Ariel Pakes & Richard Ericson, 1989. "Empirical Implications of Alternative Models of Firm Dynamics," NBER Working Papers 2893, National Bureau of Economic Research, Inc.
  6. Almus, Matthias & Nerlinger, Eric A, 2000. " Testing "Gibrat's Law" for Young Firms--Empirical Results for West Germany," Small Business Economics, Springer, vol. 15(1), pages 1-12, August.
  7. Francesca Lotti & Enrico Santarelli & Marco Vivarelli, 2001. "The relationship between size and growth: the case of Italian newborn firms," Applied Economics Letters, Taylor & Francis Journals, vol. 8(7), pages 451-454.
  8. Klepper, Steven & Miller, John H., 1995. "Entry, exit, and shakeouts in the United States in new manufactured products," International Journal of Industrial Organization, Elsevier, vol. 13(4), pages 567-591, December.
  9. Francesca Lotti & Enrico Santarelli & Marco Vivarelli, 2003. "Does Gibrat's Law hold among young, small firms?," Journal of Evolutionary Economics, Springer, vol. 13(3), pages 213-235, August.
  10. Geroski, Paul A, 1999. "The Growth of Firms in Theory and in Practice," CEPR Discussion Papers 2092, C.E.P.R. Discussion Papers.
  11. Heshmati, Almas, 2000. "On the Growth of Micro and Small Firms," Working Paper Series in Economics and Finance 396, Stockholm School of Economics.
  12. Stephen Hymer & Peter Pashigian, 1962. "Firm Size and Rate of Growth," Journal of Political Economy, University of Chicago Press, vol. 70, pages 556.
  13. Barbara Roberts & Steve Thompson, 2003. "Entry and Exit in a Transition Economy: The Case of Poland," Review of Industrial Organization, Springer, vol. 22(3), pages 225-243, May.
  14. Chesher, Andrew, 1979. "Testing the Law of Proportionate Effect," Journal of Industrial Economics, Wiley Blackwell, vol. 27(4), pages 403-11, June.
  15. Francesca Lotti & Enrico Santarelli, 2004. "Industry Dynamics and the Distribution of Firm Sizes: A Nonparametric Approach," Southern Economic Journal, Southern Economic Association, vol. 70(3), pages 443-466, January.
  16. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
  17. Fotopoulos, Georgios & Louri-Dendrinou, Eleni, 2002. "Corporate Growth and FDI: Are Multinationals Stimulating Local Industrial Development?," CEPR Discussion Papers 3128, C.E.P.R. Discussion Papers.
  18. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  19. F. Lotti & E. Santarelli, 2001. "Industry Dynamics and the Distiribution of Firm Sizes: A Non-Parametric Apporoach," Working Papers 406, Dipartimento Scienze Economiche, Universita' di Bologna.
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Cited by:
  1. Crosato, Lisa & Destefanis, Sergio & Ganugi, Piero, 2007. "Technology and Firm Size Distribution:Evidence from Italian Manufacturing," CELPE Discussion Papers 102, CELPE - Centre of Labour Economics and Economic Policy, University of Salerno, Italy.

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