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

  • Julian di Giovanni

    (International Monetary Fund)

  • Andrei A. Levchenko

    (University of Michigan)

  • Romain Ranciere

    (International Monetary Fund, PSE and CEPR)

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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File URL: http://www.fordschool.umich.edu/rsie/workingpapers/Papers576-600/r598.pdf
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Paper provided by Research Seminar in International Economics, University of Michigan in its series Working Papers with number 598.

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Length: 29 pages
Date of creation: Mar 2010
Date of revision:
Handle: RePEc:mie:wpaper:598
Contact details of provider: Postal: ANN ARBOR MICHIGAN 48109
Web page: http://fordschool.umich.edu/rsie/

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  1. Julian di Giovanni & Andrei A. Levchenko, 2011. "Country Size, International Trade, and Aggregate Fluctuations in Granular Economies," NBER Working Papers 17335, National Bureau of Economic Research, Inc.
  2. Xavier Gabaix, 2005. "The Granular Origins of Aggregate Fluctuations," 2005 Meeting Papers 470, Society for Economic Dynamics.
  3. Yeaple, Stephen & Helpman, Elhanan & Melitz, Marc, 2004. "Export versus FDI with Heterogeneous Firms," Scholarly Articles 3229098, Harvard University Department of Economics.
  4. Esteban Rossi-Hansberg & Mark L. J. Wright, 2003. "Urban structure and growth," Discussion Paper / Institute for Empirical Macroeconomics 141, Federal Reserve Bank of Minneapolis.
  5. Costas Arkolakis, 2008. "Market Penetration Costs and the New Consumers Margin in International Trade," NBER Working Papers 14214, National Bureau of Economic Research, Inc.
  6. Xavier Gabaix & Rustam Ibragimov, 2011. "Rank - 1 / 2: A Simple Way to Improve the OLS Estimation of Tail Exponents," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 29(1), pages 24-39, January.
  7. 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.
  8. 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.
  9. Costas Arkolakis, 2009. "A Unified Theory of Firm Selection and Growth," CESifo Working Paper Series 2679, CESifo Group Munich.
  10. Xavier Gabaix & Augustin Landier, 2008. "Why Has CEO Pay Increased So Much?," The Quarterly Journal of Economics, MIT Press, vol. 123(1), pages 49-100, 02.
  11. Francis Kramarz & Jonathan Eaton & Samuel Kortum, 2005. "An Anatomy of International Trade: Evidence from French Firms," 2005 Meeting Papers 197, Society for Economic Dynamics.
  12. 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.
  13. Francisco J. Buera & Yongseok Shin, 2006. "Financial Frictions and the Persistence of History," 2006 Meeting Papers 792, Society for Economic Dynamics.
  14. 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.
  15. Xavier Gabaix, 1999. "Zipf'S Law For Cities: An Explanation," The Quarterly Journal of Economics, MIT Press, vol. 114(3), pages 739-767, August.
  16. Julian di Giovanni & Andrei A. Levchenko, 2009. "International Trade and Aggregate Fluctuations in Granular Economies," Working Papers 585, Research Seminar in International Economics, University of Michigan.
  17. 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.
  18. Xavier Gabaix, 2009. "Power Laws in Economics and Finance," Annual Review of Economics, Annual Reviews, vol. 1(1), pages 255-294, 05.
  19. 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.
  20. Easterly, William & Reshef, Ariell & Schwenkenberg, Julia, 2009. "The power of exports," Policy Research Working Paper Series 5081, The World Bank.
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