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Towards an Explanation of the Exponential Distribution of Firm Growth Rates

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  • Alex Coad

    ()
    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, Max Planck Institute of Economics - Evolutionary Economics Group)

Abstract

A robust feature of the corporate growth process is the exponential distribution of firm growth rates. This striking empirical regularity has been found to hold for a number of different datasets and at different levels of aggregation. In this paper, we propose a simple theoretical model capable of explaining this observed exponential distribution. We do not attempt to generalize on where growth opportunities come from, but rather we focus on how firms build upon growth opportunities. We borrow ideas from the self-organizing criticality literature to explain how the interdependent nature of discrete resources may lead to the triggering off a series of additions to a firm's resources. In a formal model we consider the case of employment growth in a hierarchy, and observe that growth rates follow an exponential distribution.

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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00113346.

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Date of creation: Mar 2006
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Handle: RePEc:hal:cesptp:halshs-00113346

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Keywords: Firm growth rates; exponential distribution; hierarchy.;

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  1. Giulio Bottazzi & Elena Cefis & Giovanni Dosi & Angelo Secchi, 2003. "Invariances and Diversities in the Evolution of Manufacturing Industries," LEM Papers Series, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy 2003/21, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  2. Bak, Per & Chen, Kan & Scheinkman, Jose & Woodford, Michael, 1993. "Aggregate fluctuations from independent sectoral shocks: self-organized criticality in a model of production and inventory dynamics," Ricerche Economiche, Elsevier, Elsevier, vol. 47(1), pages 3-30, March.
  3. Bottazzi, Giulio & Dosi, Giovanni & Lippi, Marco & Pammolli, Fabio & Riccaboni, Massimo, 2001. "Innovation and corporate growth in the evolution of the drug industry," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 19(7), pages 1161-1187, July.
  4. Giulio Bottazzi & Elena Cefis & Giovanni Dosi, 2001. "Corporate Growth and Industrial Structure. Some Evidence from the Italian Manufacturing Industry," LEM Papers Series, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy 2001/08, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  5. Oliver E. Williamson, 1967. "Hierarchical Control and Optimum Firm Size," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 75, pages 123.
  6. Giulio Bottazzi & Angelo Secchi, 2006. "Explaining the distribution of firm growth rates," RAND Journal of Economics, RAND Corporation, vol. 37(2), pages 235-256, 06.
  7. Giulio Bottazzi & Alex Coad & Nadia Jacoby & Angelo Secchi, 2005. "Corporate Growth and Industrial Dynamics: Evidence from French Manufacturing," LEM Papers Series, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy 2005/21, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  8. Giulio Bottazzi & Angelo Secchi, 2003. "Common Properties and Sectoral Specificities in the Dynamics of U.S. Manufacturing Companies," Review of Industrial Organization, Springer, Springer, vol. 23(3_4), pages 217-232, December.
  9. Nunes Amaral, Luís A & Buldyrev, Sergey V & Havlin, Shlomo & Maass, Philipp & Salinger, Michael A & Eugene Stanley, H & Stanley, Michael H.R, 1997. "Scaling behavior in economics: The problem of quantifying company growth," Physica A: Statistical Mechanics and its Applications, Elsevier, Elsevier, vol. 244(1), pages 1-24.
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Cited by:
  1. Alex Coad, 2006. "A Closer Look at Serial Growth Rate Correlation," LEM Papers Series, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy 2006/29, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  2. Daria Ciriaci & Pietro Moncada-Paternò-Castello & Peter Voigt, 2012. "Does size or age of innovative firms affect their growth persistence? -Evidence from a panel of innovative Spanish firms-," JRC-IPTS Working Papers on Corporate R&D and Innovation 2012-03, Institute of Prospective Technological Studies, Joint Research Centre.
  3. Alex Coad, 2006. "Understanding the processes of firm growth - a closer look at serial growth rate correlation," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00118801, HAL.

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