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Gibrat's Law and Market Selection in the Radio, TV & Telecommunications Equipment Industry

  • F. Lotti
  • E. Santarelli
  • M. Vivarelli

According to Gibrat’s Law of Proportionate Effect, the growth rate of a given firm is independent of its size at the beginning of the period examined. In contrast to the previous literature on the subject, this paper seeks to test the Law by taking account of both the entry process and the role of survival/failure in reshaping a given population of firms over time. It does so by focusing on the entire population of firms (including newborn ones) in the Italian Radio, TV & Telecommunications equipment industry and tracking them over seven years. Consistently with the previous literature, it finds that - in general - Gibrat’s Law is to be rejected, since smaller firms tend to grow faster than their larger counterparts. However, the paper’s main finding is that this rejection of Gibrat’s Law may be due to market dynamics and selection. In other words, it is due to the entry process and the presence of transient smaller firms. Indeed, whilst it is found that Gibrat’s Law has to be rejected over a seven year period during which both incumbent and newborn firms are considered, for both sub-populations of surviving firms a convergence towards Gibrat-like behavior over time can be detected. Thus, market selection “cleans” the original population of firms and the resulting industrial “core” (mature, larger, well-established and most efficient firms) does not seem to depart from a Gibrat-like pattern of growth.

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Paper provided by Dipartimento Scienze Economiche, Universita' di Bologna in its series Working Papers with number 478.

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Date of creation: 2003
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Handle: RePEc:bol:bodewp:478
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  1. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
  2. Chesher, Andrew, 1979. "Testing the Law of Proportionate Effect," Journal of Industrial Economics, Wiley Blackwell, vol. 27(4), pages 403-11, June.
  3. Heckman, James J, 1979. "Sample Selection Bias as a Specification Error," Econometrica, Econometric Society, vol. 47(1), pages 153-61, January.
  4. Heshmati, Almas, 2000. "On the Growth of Micro and Small Firms," SSE/EFI Working Paper Series in Economics and Finance 396, Stockholm School of Economics.
  5. Stephen Hymer & Peter Pashigian, 1962. "Firm Size and Rate of Growth," Journal of Political Economy, University of Chicago Press, vol. 70, pages 556.
  6. Barbara Roberts & Steve Thompson, 2003. "Entry and Exit in a Transition Economy: The Case of Poland," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 22(3), pages 225-243, May.
  7. Ariel Pakes & Richard Ericson, 1989. "Empirical Implications of Alternative Models of Firm Dynamics," NBER Working Papers 2893, National Bureau of Economic Research, Inc.
  8. Klepper, Steven & Miller, John H., 1995. "Entry, exit, and shakeouts in the United States in new manufactured products," International Journal of Industrial Organization, Elsevier, vol. 13(4), pages 567-591, December.
  9. Geroski, Paul A, 1999. "The Growth of Firms in Theory and in Practice," CEPR Discussion Papers 2092, C.E.P.R. Discussion Papers.
  10. Francesca Lotti & Enrico Santarelli & Marco Vivarelli, 2003. "Does Gibrat's Law hold among young, small firms?," Journal of Evolutionary Economics, Springer, vol. 13(3), pages 213-235, August.
  11. Fotopoulos, Georgios & Louri-Dendrinou, Eleni, 2002. "Corporate Growth and FDI: Are Multinationals Stimulating Local Industrial Development?," CEPR Discussion Papers 3128, C.E.P.R. Discussion Papers.
  12. Maria Letizia Giorgetti, 2003. "Lower Bound Estimation - Quantile Regression and Simplex Method: An Application to Italian Manufacturing Sectors," Journal of Industrial Economics, Wiley Blackwell, vol. 51(1), pages 113-120, 03.
  13. Almus, Matthias & Nerlinger, Eric A, 2000. "Testing "Gibrat's Law" for Young Firms--Empirical Results for West Germany," Small Business Economics, Springer, vol. 15(1), pages 1-12, August.
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