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Power Laws in Firm Size and Openness to Trade

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Author Info

  • Andrei A. Levchenko
  • Julian di Giovanni
  • Romain Ranciere

Abstract

Existing estimates of power laws in firm size typically ignore the impact of international trade. Using a simple theoretical framework, we show that international trade systematically affects the distribution of firm size: the power law exponent among exporting firms should be strictly lower in absolute value than the power law exponent among non-exporting rms. We use a dataset of French firms to demonstrate that this prediction is strongly supported by the data. While estimates of power law exponents have been used to pin down parameters in theoretical and quantitative models, our analysis implies that the existing estimates are systematically lower than the true values. We propose two simple ways of estimating power law parameters that take explicit account of exporting behavior.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/109.

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Length: 31
Date of creation: 01 Apr 2010
Date of revision:
Handle: RePEc:imf:imfwpa:10/109

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Related research

Keywords: International trade; Corporate sector; Trade models; exporting firms; exporters; probability; export sales; export markets; equation; prediction; statistics; predictions; standard errors; exporter; correlation; nonlinearity; probability function; export entry; export market; horizontal axis; statistic; standard error; total exports; value of exports; probability distributions; trade flows; sample size; descriptive statistics; random variable; regression equation; survey; probability density; statistical model; cumulative distribution function;

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References

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  1. Andrei A. Levchenko & Julian di Giovanni, 2009. "International Trade and Aggregate Fluctuations in Granular Economies," 2009 Meeting Papers 491, Society for Economic Dynamics.
  2. Esteban Rossi-Hansberg & Mark L.J. Wright, 2005. "Urban Structure and Growth," NBER Working Papers 11262, National Bureau of Economic Research, Inc.
  3. Jonathan Eaton & Samuel Kortum & Francis Kramarz, 2011. "An Anatomy of International Trade: Evidence From French Firms," Econometrica, Econometric Society, vol. 79(5), pages 1453-1498, 09.
  4. Melitz, Marc J, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," CEPR Discussion Papers 3381, C.E.P.R. Discussion Papers.
  5. Costas Arkolakis, 2011. "A Unified Theory of Firm Selection and Growth," NBER Working Papers 17553, National Bureau of Economic Research, Inc.
  6. Costas Arkolakis, 2010. "Market Penetration Costs and the New Consumers Margin in International Trade," Journal of Political Economy, University of Chicago Press, vol. 118(6), pages 1151 - 1199.
  7. Francisco J. Buera & Yongseok Shin, 2006. "Financial Frictions and the Persistence of History," 2006 Meeting Papers 792, Society for Economic Dynamics.
  8. Jeroen Hinloopen & Charles van Marrewijk, 2006. "Comparative Advantage, the Rank-size Rule, and Zipf's Law," Tinbergen Institute Discussion Papers 06-100/1, Tinbergen Institute.
  9. Easterly, William & Reshef, Ariell & Schwenkenberg, Julia, 2009. "The power of exports," Policy Research Working Paper Series 5081, The World Bank.
  10. Gordon H. Hanson & Chong Xiang, 2008. "Testing the Melitz Model of Trade: An Application to U.S. Motion Picture Exports," NBER Working Papers 14461, National Bureau of Economic Research, Inc.
  11. Erzo G. J. Luttmer, 2007. "Selection, Growth, and the Size Distribution of Firms," The Quarterly Journal of Economics, MIT Press, vol. 122(3), pages 1103-1144, 08.
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Citations

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Cited by:
  1. Arita, Shawn & Tanaka, Kiyoyasu, 2011. "Simulating heterogeneous multinational firms," IDE Discussion Papers 296, Institute of Developing Economies, Japan External Trade Organization(JETRO).
  2. Kiyoyasu Tanaka & Naomi Hatsukano, 2011. "The size distribution of all Cambodian establishments," Economics Bulletin, AccessEcon, vol. 31(3), pages 2128-2137.
  3. Franziska Bremus, 2011. "Financial Integration and Macroeconomic Stability: What Role for Large Banks?," Discussion Papers of DIW Berlin 1178, DIW Berlin, German Institute for Economic Research.

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