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Understanding the Variations in Gibrat's Law with a Markov-Perfect Dynamic Industry Model

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  • Ana Sofia Domingues Rodrigues
  • Christopher A. Laincz

Abstract

Gibrat's Law of proportionate effect, as applied to firms, states that the growth rate of a firm is independent of its size. Empirical work on firm dynamics finds crucial deviations from Gibrat's Law such as smaller firms growing faster than larger firms (Evans, 1987, and Hall, 1987), a negative relationship between the variance of growth rates and size (Dunne and Hughes, 1994), and first-order positive autocorrelation in the growth rates (Kumar, 1995). Moreover, the degree of deviation from Gibrat's Law varies across industries. This paper contributes to our understanding of the forces that make Gibrat's Law a close, but imperfect approximation of firm size distributions and seeks to determine potential sources of cross-industry variation. Here, we employ an extension of the Ericson-Pakes (1995) theoretical framework that allows for firm growth developed by Laincz (2004a). By varying key parameters, the simulations demonstrate potential sources for the various, and sometimes conflicting, results on Gibrat's Law uncovered in the empirical literature

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Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 173.

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Date of creation: 11 Aug 2004
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Handle: RePEc:sce:scecf4:173

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Keywords: Gibrat's Law; Firm Size Distribution; Entry; Exit;

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References

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  1. 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.
  2. Hall, Bronwyn H, 1987. "The Relationship between Firm Size and Firm Growth in the U.S. Manufacturing Sector," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 583-606, June.
  3. Kumar, M S, 1985. "Growth, Acquisition Activity and Firm Size: Evidence from the United Kingdom," Journal of Industrial Economics, Wiley Blackwell, vol. 33(3), pages 327-38, March.
  4. Jose A. F. Machado & Jose Mata, 2000. "Box-Cox quantile regression and the distribution of firm sizes," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(3), pages 253-274.
  5. Singh, Ajit & Whittington, Geoffrey, 1975. "The Size and Growth of Firms," MPRA Paper 51715, University Library of Munich, Germany.
  6. Laincz, Christopher A., 2005. "Market structure and endogenous productivity growth: how do R&D subsidies affect market structure?," Journal of Economic Dynamics and Control, Elsevier, vol. 29(1-2), pages 187-223, January.
  7. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
  8. Evans, David S, 1987. "The Relationship between Firm Growth, Size, and Age: Estimates for 100 Manufacturing Industries," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 567-81, June.
  9. 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.
  10. Mansfield, Edwin, 1985. "How Rapidly Does New Industrial Technology Leak Out?," Journal of Industrial Economics, Wiley Blackwell, vol. 34(2), pages 217-23, December.
  11. Roy Thurik & Enrico Santarelli & David Audretsch & Luuk Klomp, 2002. "Gibrat's Law: Are the Services Different?," Scales Research Reports H200201, EIM Business and Policy Research.
  12. Mansfield, Edwin & Schwartz, Mark & Wagner, Samuel, 1981. "Imitation Costs and Patents: An Empirical Study," Economic Journal, Royal Economic Society, vol. 91(364), pages 907-18, December.
  13. Hart, Peter E & Oulton, Nicholas, 1996. "Growth and Size of Firms," Economic Journal, Royal Economic Society, vol. 106(438), pages 1242-52, September.
  14. 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.
  15. Ericson, Richard & Pakes, Ariel, 1995. "Markov-Perfect Industry Dynamics: A Framework for Empirical Work," Review of Economic Studies, Wiley Blackwell, vol. 62(1), pages 53-82, January.
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Cited by:
  1. Kontsevoy, Denis, 2013. "Empirical analysis of Russian commercial banks growth dynamics," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 29(1), pages 67-81.

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