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The complex behavior of firms' size dynamics

  • Gallegati, M.
  • Palestrini, A.

This paper's aim is to shed some light to the complex dynamics of firms' size distribution (FSD). In particular we give an alternative explanation to the Cabral and Mata (2003) finding. In that paper they show that the distribution of surviving firms tends to the log-normal distribution. As an explanation they consider the "small-firms selection" argument and introduce the "financial constraint" model. We give an alternative explanation based on a "sample selection bias" argumentation. In other terms, a cohort of surviving firms may have a positive average rate of growth. This simple fact breaks the assumptions needed in order to have an asymptotic Pareto FSD. Furthermore, we show how a simple modification of a well-known multiplicative process of firms' growth, taking into account common and idiosyncratic elements, may reconcile an old aggregate-sector puzzle (Quandt, 1966) on firms' size distribution reported in the literature. The paper shows the possibility to have aggregate Pareto distributed FSD and non-Pareto distributed sectors.

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Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 75 (2010)
Issue (Month): 1 (July)
Pages: 69-76

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Handle: RePEc:eee:jeborg:v:75:y:2010:i:1:p:69-76
Contact details of provider: Web page: http://www.elsevier.com/locate/jebo

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  1. Mustafa Caglayan & Neslihan Ozkan & Christopher F Baum, 2002. "Sectoral Fluctuations in U.K. Firms' Investment Expenditures," Research Papers 2002_01, University of Liverpool Management School.
  2. Lucia Alessi & Matteo Barigozzi & Marco Capasso, 2006. "A Dynamic Factor Analysis of Business Cycle on Firm-Level Data," LEM Papers Series 2006/27, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  3. Shea, John S, 2002. "Complementarities and Comovements," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(2), pages 412-33, May.
  4. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
  5. Erzo G. J. Luttmer, 2007. "Selection, Growth, and the Size Distribution of Firms," The Quarterly Journal of Economics, MIT Press, vol. 122(3), pages 1103-1144, 08.
  6. Lu�s M B Cabral & Jos� Mata, 2003. "On the Evolution of the Firm Size Distribution: Facts and Theory," American Economic Review, American Economic Association, vol. 93(4), pages 1075-1090, September.
  7. Mario Forni & Marc Hallin & Marco Lippi & Lucrezia Reichlin, 2000. "The Generalized Dynamic-Factor Model: Identification And Estimation," The Review of Economics and Statistics, MIT Press, vol. 82(4), pages 540-554, November.
  8. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  9. Gaffeo, Edoardo & Gallegati, Mauro & Palestrini, Antonio, 2003. "On the size distribution of firms: additional evidence from the G7 countries," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 324(1), pages 117-123.
  10. Horvath, Michael, 2000. "Sectoral shocks and aggregate fluctuations," Journal of Monetary Economics, Elsevier, vol. 45(1), pages 69-106, February.
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