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The Firm Size Distribution in a Small Open Economy: Theory and Evidence

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Author Info
Qi Li (SPIRe and Geary Institute)
Patrick Paul Walsh (SPIRe and Geary Institute)

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Abstract

We construct a theoretical model of the dynamic processes (firm entry, growth, decline, and exit) that underpin the determination of a limiting firm size distribution (FSD). In particular, we model such dynamic processes using key structural parameters; sunk cost, exogenous entry constraints, and opportunity values of finite duration. The limiting FSD we derive, in steady state, turns out to be a combination of a Logarithmic and Zipf distribution. We estimate these structural parameters using long periods of Irish company data for defined cohorts of firms, in terms of trade orientation, within narrowly defined industries. Within non-exporting and exporting samples of companies our model fits the actual FSD well with a good return to the Zipf distribution in the upper tail, that is less dependent on the estimated structural parameters, and a good return at the lower tail, where the Logarithmic effects are endogenously driven by firm heterogeneity in estimated structural parameters.

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File URL: http://geary.ucd.ie/images/Publications/WorkingPapers/gearywp200920.pdf
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Paper provided by Geary Institute, University College Dublin in its series Working Papers with number 200920.

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Length: 43 pages
Date of creation: 13 Jul 2009
Date of revision:
Handle: RePEc:ucd:wpaper:200920

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Find related papers by JEL classification:
L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
F15 - International Economics - - Trade - - - Economic Integration

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    Other versions:
  3. 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. [Downloadable!]
    Other versions:
  4. Peter Thompson & Steven Klepper, 2003. "Submarkets and the Evolution of Market Structure," Working Papers 0303, Florida International University, Department of Economics. [Downloadable!]
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    Other versions:
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  14. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November. [Downloadable!] (restricted)
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  15. Steven Klepper & Elizabeth Graddy, 1990. "The Evolution of New Industries and the Determinants of Market Structure," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 27-44, Spring. [Downloadable!] (restricted)
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