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Power Laws in Firm Size and Openness to Trade: Measurement and Implications

  • di Giovanni, Julian
  • Levchenko, Andrei A.
  • Rancière, Romain

Existing estimates of power laws in firm size typically ignore the impact of international trade. Using a simple theoretical framework, we show that international trade systematically affects the distribution of firm size: the power law exponent among exporting firms should be strictly lower in absolute value than the power law exponent among non-exporting firms. We use a dataset of French firms to demonstrate that this prediction is strongly supported by the data. While estimates of power law exponents have been used to pin down parameters in theoretical and quantitative models, our analysis implies that the existing estimates are systematically lower than the true values. We propose two simple ways of estimating power law parameters that take explicit account of exporting behavior.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7773.

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Date of creation: Apr 2010
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Handle: RePEc:cpr:ceprdp:7773
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  1. Easterly, William & Reshef, Ariell & Schwenkenberg, Julia, 2009. "The power of exports," Policy Research Working Paper Series 5081, The World Bank.
  2. Xavier Gabaix, 2005. "The Granular Origins of Aggregate Fluctuations," 2005 Meeting Papers 470, Society for Economic Dynamics.
  3. Xavier Gabaix & Augustin Landier, 2006. "Why Has CEO Pay Increased So Much?," NBER Working Papers 12365, National Bureau of Economic Research, Inc.
  4. Mark Wright & Esteban Rossi-Hansberg, 2004. "Urban Structure and Growth," 2004 Meeting Papers 33, Society for Economic Dynamics.
  5. Costas Arkolakis, 2010. "Market Penetration Costs and the New Consumers Margin in International Trade," Journal of Political Economy, University of Chicago Press, vol. 118(6), pages 1151 - 1199.
  6. Costas Arkolakis, 2011. "A Unified Theory of Firm Selection and Growth," NBER Working Papers 17553, National Bureau of Economic Research, Inc.
  7. Julian di Giovanni & Andrei A. Levchenko, 2012. "Country Size, International Trade, and Aggregate Fluctuations in Granular Economies," Journal of Political Economy, University of Chicago Press, vol. 120(6), pages 1083 - 1132.
  8. Xavier Gabaix, 1999. "Zipf'S Law For Cities: An Explanation," The Quarterly Journal of Economics, MIT Press, vol. 114(3), pages 739-767, August.
  9. Jonathan Eaton & Samuel Kortum, 2004. "An Anatomy of International Trade: Evidence from French Firms," 2004 Meeting Papers 802, Society for Economic Dynamics.
  10. Xavier Gabaix & Rustam Ibragimov, 2007. "Rank-1/2: A Simple Way to Improve the OLS Estimation of Tail Exponents," NBER Technical Working Papers 0342, National Bureau of Economic Research, Inc.
  11. Xavier Gabaix, 2008. "Power Laws in Economics and Finance," NBER Working Papers 14299, National Bureau of Economic Research, Inc.
  12. Francisco J. Buera & Yongseok Shin, 2006. "Financial Frictions and the Persistence of History," 2006 Meeting Papers 792, Society for Economic Dynamics.
  13. Yeaple, Stephen & Helpman, Elhanan & Melitz, Marc, 2004. "Export versus FDI with Heterogeneous Firms," Scholarly Articles 3229098, Harvard University Department of Economics.
  14. Hanson, Gordon & Xiang, Chong, 2011. "Trade barriers and trade flows with product heterogeneity: An application to US motion picture exports," Journal of International Economics, Elsevier, vol. 83(1), pages 14-26, January.
  15. Andrei A. Levchenko & Julian di Giovanni, 2009. "International Trade and Aggregate Fluctuations in Granular Economies," 2009 Meeting Papers 491, Society for Economic Dynamics.
  16. Melitz, Marc J, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," CEPR Discussion Papers 3381, C.E.P.R. Discussion Papers.
  17. Francisco J. Buera & Yongseok Shin, 2010. "Financial Frictions and the Persistence of History: A Quantitative Exploration," NBER Working Papers 16400, National Bureau of Economic Research, Inc.
  18. 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.
  19. Thomas Chaney, 2008. "Distorted Gravity: The Intensive and Extensive Margins of International Trade," American Economic Review, American Economic Association, vol. 98(4), pages 1707-21, September.
  20. Gordon H. Hanson & Chong Xiang, 2008. "Testing the Melitz Model of Trade: An Application to U.S. Motion Picture Exports," NBER Working Papers 14461, National Bureau of Economic Research, Inc.
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