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Generalizing Gibrat. Reasonable Multiplicative Models of Firm Dynamics

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  • Matteo Richiardi

    (LABORatorio Riccardo Revelli Centre for Employment Studies)

Abstract

Multiplicative models of firm dynamics ‘à la Gibrat’ have become a standard reference in industrial organization. However, some unpleasant properties of their implied dynamics – namely, their explosive or implosive behaviour (firm size and number collapsing to zero or increasing indefinitely) - have been given only very little attention. In this paper I investigate which modifications to the standard multiplicative model of firm dynamics lead to stable (and reasonable) distributions of firm size. An agent-based simulation study is performed, and a methodology is proposed to recover the (aggregate) laws governing the system by estimating the reduced form, i.e. the local data generating process, on the artificial data resulting from a number of artificial experiments. I show that in order to obtain stable systems for a wide range of average growth rate, either heteroskedasticity in the growth rates has to be assumed, or entry and exit mechanisms included. While other particular, ad hoc, entry and exit mechanisms could be imagined, I show that combining the broad class of threshold entry mechanisms and the more restricted class of threshold exit mechanisms with overcapacity penalizing all firms (where entry and exit are determined with reference to an exogenously defined total capacity of the market), lead to stable distributions even in the case of growth rate homoskedasticity, given a non-zero minimum threshold for firm size.

Suggested Citation

  • Matteo Richiardi, 2003. "Generalizing Gibrat. Reasonable Multiplicative Models of Firm Dynamics," Industrial Organization 0304004, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpio:0304004
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    2. Segarra, Agustí & Teruel, Mercedes, 2012. "An appraisal of firm size distribution: Does sample size matter?," Journal of Economic Behavior & Organization, Elsevier, vol. 82(1), pages 314-328.
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    More about this item

    Keywords

    Firm growth Gibrat Entry Exit Simulation;

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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