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The Firm Size Distribution in a Small Open Economy: Theory and Evidence

  • Qi Li

    (SPIRe and Geary Institute)

  • Patrick Paul Walsh

    (SPIRe and Geary Institute)

We construct a theoretical model of the dynamic processes (firm entry, growth, decline, and exit) that underpin the determination of a limiting firm size distribution (FSD). In particular, we model such dynamic processes using key structural parameters; sunk cost, exogenous entry constraints, and opportunity values of finite duration. The limiting FSD we derive, in steady state, turns out to be a combination of a Logarithmic and Zipf distribution. We estimate these structural parameters using long periods of Irish company data for defined cohorts of firms, in terms of trade orientation, within narrowly defined industries. Within non-exporting and exporting samples of companies our model fits the actual FSD well with a good return to the Zipf distribution in the upper tail, that is less dependent on the estimated structural parameters, and a good return at the lower tail, where the Logarithmic effects are endogenously driven by firm heterogeneity in estimated structural parameters.

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File URL: http://www.ucd.ie/geary/static/publications/workingpapers/gearywp200920.pdf
File Function: First version, 2009
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Paper provided by Geary Institute, University College Dublin in its series Working Papers with number 200920.

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Length: 43 pages
Date of creation: 13 Jul 2009
Date of revision:
Handle: RePEc:ucd:wpaper:200920
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  1. Kumar, M S, 1985. "Growth, Acquisition Activity and Firm Size: Evidence from the United Kingdom," Journal of Industrial Economics, Wiley Blackwell, vol. 33(3), pages 327-38, March.
  2. Francesca Lotti & Enrico Santarelli, 2004. "Industry Dynamics and the Distribution of Firm Sizes: A Nonparametric Approach," Southern Economic Journal, Southern Economic Association, vol. 70(3), pages 443-466, January.
  3. Evans, David S, 1987. "The Relationship between Firm Growth, Size, and Age: Estimates for 100 Manufacturing Industries," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 567-81, June.
  4. Thorbj¯rn Knudsen, 2001. "Zipf's Law for Cities and Beyond: The Case of Denmark," American Journal of Economics and Sociology, Wiley Blackwell, vol. 60(1), pages 123-146, 01.
  5. repec:fiu:wpaper:0303 is not listed on IDEAS
  6. Ciara Whelan & Patrick P. Walsh & Qi Li, 2007. "Jobless growth through creative destruction : Ireland's industrial development path 1972-2003," Working Papers 10197/142, School of Economics, University College Dublin.
  7. Stephen Hymer & Peter Pashigian, 1962. "Firm Size and Rate of Growth," Journal of Political Economy, University of Chicago Press, vol. 70, pages 556.
  8. Christopher A Laincz & Ana Sofia Domingues Rodrigues, . "A Theoretical Foundation for Understanding Firm Size Distributions and Gibrat's Law," Discussion Papers 05/34, Department of Economics, University of York.
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  13. Dunne, T. & Roberts, M.J. & Samuelson, L., 1988. "The Growth And Failure Of U.S. Manufacturing Plants," Papers 1-87-5, Pennsylvania State - Department of Economics.
  14. Erzo G.J. Luttmer, 2004. "The size distribution of firms in an economy with fixed and entry costs," Working Papers 633, Federal Reserve Bank of Minneapolis.
  15. F. Lotti & E. Santarelli, 2001. "Industry Dynamics and the Distiribution of Firm Sizes: A Non-Parametric Apporoach," Working Papers 406, Dipartimento Scienze Economiche, Universita' di Bologna.
  16. Emin Dinlersoz & Glenn MacDonald, 2009. "The Industry Life-Cycle of the Size Distribution of Firms," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(4), pages 648-667, October.
  17. Dunne, T. & Roberts, M.J., 1989. "Variation In Producer Turnover Across U.S. Manufacturing Industries," Papers 12-89-2, Pennsylvania State - Department of Economics.
  18. Gerrit de Wit, 2004. "Firm Size Distributions : An overview of steady-state distributions resulting from firm dynamics models," Scales Research Reports N200418, EIM Business and Policy Research.
  19. Li, Qi & Walsh, Patrick Paul & Whelan, Ciara, 2007. "Jobless Growth through Creative Destruction: Ireland’s Industrial Development Path 1972–2003," IZA Discussion Papers 3211, Institute for the Study of Labor (IZA).
  20. Audretsch, David B & Mahmood, Talat, 1995. "New Firm Survival: New Results Using a Hazard Function," The Review of Economics and Statistics, MIT Press, vol. 77(1), pages 97-103, February.
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