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Power Laws in Firm Size and Openness to Trade: Measurement and Implications

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Author Info

  • Julian di Giovanni

    (International Monetary Fund)

  • Andrei A. Levchenko

    (University of Michigan)

  • Romain Ranciere

    (International Monetary Fund, PSE and CEPR)

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 firms. 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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File URL: http://www.fordschool.umich.edu/rsie/workingpapers/Papers576-600/r598.pdf
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Bibliographic Info

Paper provided by Research Seminar in International Economics, University of Michigan in its series Working Papers with number 598.

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Length: 29 pages
Date of creation: Mar 2010
Date of revision:
Handle: RePEc:mie:wpaper:598

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Postal: ANN ARBOR MICHIGAN 48109
Web page: http://www.fordschool.umich.edu/rsie/
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Keywords: Firm Size Distribution; International Trade; Power Laws;

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References

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  10. Yongseok Shin & Francisco Buera, 2007. "Financial Frictions and the Persistence of History: A Quantitative Exploration," 2007 Meeting Papers 300, Society for Economic Dynamics.
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  13. Easterly, William & Reshef, Ariell & Schwenkenberg, Julia, 2009. "The power of exports," Policy Research Working Paper Series 5081, The World Bank.
  14. Costas Arkolakis, 2011. "A Unified Theory of Firm Selection and Growth," NBER Working Papers 17553, National Bureau of Economic Research, Inc.
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  17. 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.
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