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Defending Gibrat’s Law as a Long-Run Regularity

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  • Lotti, Francesca

    ()
    (Bank of Italy)

  • Santarelli, Enrico

    ()
    (University of Bologna)

  • Vivarelli, Marco

    ()
    (Università Cattolica del Sacro Cuore)

Abstract

According to Gibrat’s Law of Proportionate Effect, the growth rate of a given firm is independent of its size at the beginning of the period examined. While earlier studies tended to confirm the Law, more recent research generally rejects it. This paper reconciles these two streams of literature, taking into account the role of market selection and learning in reshaping a given population of firms through time. Consistently with previous studies, we found that Gibrat’s Law has to be rejected ex ante, since smaller firms tend to grow faster than their larger counterparts. However, a significant convergence towards Gibrat-like behavior can be detected ex post. This finding is an indication that market selection “cleans” the original population of firms, so that the resulting industrial “core” does not depart from a Gibrat-like pattern of growth. From a theoretical point of view, this result is consistent with those models based on passive and active learning, and can be seen as a defense of the validity of the Law in the long-run.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2744.

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Length: 26 pages
Date of creation: Apr 2007
Date of revision:
Publication status: published in: Small Business Economics, 2009, 32(1), 31-44
Handle: RePEc:iza:izadps:dp2744

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Keywords: firm growth; firm survival; firm age; firm size; Gibrat’s Law;

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References

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  1. Pakes, Ariel & Ericson, Richard, 1998. "Empirical Implications of Alternative Models of Firm Dynamics," Journal of Economic Theory, Elsevier, vol. 79(1), pages 1-45, March.
  2. Eric Bartelsman & Stefano Scarpetta & Fabiano Schivardi, 2005. "Comparative analysis of firm demographics and survival: evidence from micro-level sources in OECD countries," Industrial and Corporate Change, Oxford University Press, vol. 14(3), pages 365-391, June.
  3. McCloughan, Patrick, 1995. "Simulation of Concentration Development from Modified Gibrat Growth-Entry-Exit Processes," Journal of Industrial Economics, Wiley Blackwell, vol. 43(4), pages 405-33, December.
  4. Dunne, Timothy & Roberts, Mark J & Samuelson, Larry, 1989. "The Growth and Failure of U.S. Manufacturing Plants," The Quarterly Journal of Economics, MIT Press, vol. 104(4), pages 671-98, November.
  5. Stephen Hymer & Peter Pashigian, 1962. "Firm Size and Rate of Growth," Journal of Political Economy, University of Chicago Press, vol. 70, pages 556.
  6. Francesca Lotti & Enrico Santarelli, 2001. "Industry Dynamics and the Distribution of Firm Sizes: A Non-Parametric Approach," LEM Papers Series 2001/14, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  7. Bronwyn H. Hall, 1988. "The Relationship Between Firm Size and Firm Growth in the U.S. Manufacturing Sector," NBER Working Papers 1965, National Bureau of Economic Research, Inc.
  8. Evans, David S., 1986. "Tests of Alternative Theories of Firm Growth," Working Papers 86-36, C.V. Starr Center for Applied Economics, New York University.
  9. Anthony Endres & Christine Woods, 2006. "Modern Theories of Entrepreneurial Behavior: A Comparison and Appraisal," Small Business Economics, Springer, vol. 26(2), pages 189-202, 03.
  10. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
  11. Peter E Hart & Nicholas Oulton, . "Growth and size of firms," NIESR Discussion Papers 77, National Institute of Economic and Social Research.
  12. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
  13. Geroski, P. A., 1995. "What do we know about entry?," International Journal of Industrial Organization, Elsevier, vol. 13(4), pages 421-440, December.
  14. 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.
  15. Chesher, Andrew, 1979. "Testing the Law of Proportionate Effect," Journal of Industrial Economics, Wiley Blackwell, vol. 27(4), pages 403-11, June.
  16. 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.
  17. Kihlstrom, Richard E & Laffont, Jean-Jacques, 1979. "A General Equilibrium Entrepreneurial Theory of Firm Formation Based on Risk Aversion," Journal of Political Economy, University of Chicago Press, vol. 87(4), pages 719-48, August.
  18. Foti, Alessandro & Vivarelli, Marco, 1994. " An Econometric Test of the Self-Employment Model: The Case of Italy," Small Business Economics, Springer, vol. 6(2), pages 81-93, April.
  19. Marco Vivarelli, 2004. "Are All the Potential Entrepreneurs So Good?," Small Business Economics, Springer, vol. 23(1), pages 41-49, 08.
  20. Audretsch, David B. & Santarelli, Enrico & Vivarelli, Marco, 1999. "Start-up size and industrial dynamics: some evidence from Italian manufacturing," International Journal of Industrial Organization, Elsevier, vol. 17(7), pages 965-983, October.
  21. Cabral, Luis, 1995. "Sunk Costs, Firm Size and Firm Growth," Journal of Industrial Economics, Wiley Blackwell, vol. 43(2), pages 161-72, June.
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