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Does Classical Competition Explain the Statistical Features of Firm Growth?

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  • Alfarano, Simone
  • Milaković, Mishael

Abstract

We express the idea of classical competition in a statistical equilibrium model, where the tendency for competition to equalize profit rates results in an exponential power (or Subbotin) distribution. The model supports and extends recent evidence on the Laplace distribution of growth rates in firm size. We also find tent-shaped distributions in the size growth rates of Forbes Global 2000 companies, which we interpret as preliminary evidence in favor of the hypothesis that classical competition is a globally operating mechanism.

Suggested Citation

  • Alfarano, Simone & Milaković, Mishael, 2008. "Does Classical Competition Explain the Statistical Features of Firm Growth?," Economics Working Papers 2008-03, Christian-Albrechts-University of Kiel, Department of Economics.
  • Handle: RePEc:zbw:cauewp:7022
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    References listed on IDEAS

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    1. Bottazzi, Giulio & Dosi, Giovanni & Lippi, Marco & Pammolli, Fabio & Riccaboni, Massimo, 2001. "Innovation and corporate growth in the evolution of the drug industry," International Journal of Industrial Organization, Elsevier, vol. 19(7), pages 1161-1187, July.
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    3. S. V. Buldyrev & F. Pammolli & M. Riccaboni & K. Yamasaki & D.-F. Fu & K. Matia & H. E. Stanley, 2007. "A generalized preferential attachment model for business firms growth rates," The European Physical Journal B: Condensed Matter and Complex Systems, Springer;EDP Sciences, vol. 57(2), pages 131-138, May.
    4. Giulio Bottazzi & Angelo Secchi, 2006. "Explaining the distribution of firm growth rates," RAND Journal of Economics, RAND Corporation, vol. 37(2), pages 235-256, June.
    5. Smith, Adam, 1776. "An Inquiry into the Nature and Causes of the Wealth of Nations," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, number smith1776.
    6. Bottazzi, Giulio & Secchi, Angelo, 2003. "Why are distributions of firm growth rates tent-shaped?," Economics Letters, Elsevier, vol. 80(3), pages 415-420, September.
    7. Gatti, Domenico Delli & Guilmi, Corrado Di & Gaffeo, Edoardo & Giulioni, Gianfranco & Gallegati, Mauro & Palestrini, Antonio, 2005. "A new approach to business fluctuations: heterogeneous interacting agents, scaling laws and financial fragility," Journal of Economic Behavior & Organization, Elsevier, vol. 56(4), pages 489-512, April.
    8. repec:rje:randje:v:37:y:2006:2:p:235-256 is not listed on IDEAS
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    Cited by:

    1. Eliazar, Iddo & Sokolov, Igor M., 2010. "Maximization of statistical heterogeneity: From Shannon’s entropy to Gini’s index," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(16), pages 3023-3038.
    2. Scharfenaker, Ellis & dos Santos, Paulo L., 2015. "The distribution and regulation of Tobin’s q," Economics Letters, Elsevier, vol. 137(C), pages 191-194.
    3. Matthias Duschl & Thomas Brenner, 2013. "Characteristics of regional industry-specific employment growth rates' distributions," Papers in Regional Science, Wiley Blackwell, vol. 92(2), pages 249-270, June.
    4. Cosimo Abbate & Alessandro Sapio, 2016. "Gazelles and muppets in the City: Stock market listing, risk sharing, and firm growth quantiles," LEM Papers Series 2016/33, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    5. Einar Erlingsson & Simone Alfarano & Marco Raberto & Hlynur Stefánsson, 2013. "On the distributional properties of size, profit and growth of Icelandic firms," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 8(1), pages 57-74, April.
    6. Sylvain Barde, 2015. "Back to the Future: Economic Self-Organisation and Maximum Entropy Prediction," Computational Economics, Springer;Society for Computational Economics, vol. 45(2), pages 337-358, February.
    7. Giulio Bottazzi & Angelo Secchi, 2011. "A new class of asymmetric exponential power densities with applications to economics and finance," Industrial and Corporate Change, Oxford University Press, vol. 20(4), pages 991-1030, August.
    8. Halvarsson, Daniel, 2013. "Identifying High-Growth Firms," Ratio Working Papers 215, The Ratio Institute.
    9. Gregor Semieniuk & Ellis Scharfenaker, 2014. "A Bayesian Latent Variable Mixture Model for Filtering Firm Profit Rate," SCEPA working paper series. SCEPA's main areas of research are macroeconomic policy, inequality and poverty, and globalization. 2014-1, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
    10. Eliazar, Iddo I. & Cohen, Morrel H., 2013. "On the physical interpretation of statistical data from black-box systems," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(13), pages 2924-2939.
    11. Alfarano, Simone & Milaković, Mishael & Irle, Albrecht & Kauschke, Jonas, 2012. "A statistical equilibrium model of competitive firms," Journal of Economic Dynamics and Control, Elsevier, vol. 36(1), pages 136-149.
    12. Paulo dos Santos, 2016. "The Principle of Social Scaling," Working Papers 1606, New School for Social Research, Department of Economics.
    13. Eliazar, Iddo, 2014. "From entropy-maximization to equality-maximization: Gauss, Laplace, Pareto, and Subbotin," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 415(C), pages 479-492.
    14. Wagner, Friedrich & Milaković, Mishael & Alfarano, Simone, 2010. "Firm profitability and the network of organizational capabilities," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(21), pages 4769-4775.
    15. Matthias Duschl & Thomas Brenner, 2011. "Characteristics of Regional Industry-specific Employment Growth – Empirical Evidence for Germany," Working Papers on Innovation and Space 2011-07, Philipps University Marburg, Department of Geography.
    16. Sylvain Barde, 2012. "Back to the future: economic rationality and maximum entropy prediction," Studies in Economics 1202, School of Economics, University of Kent.
    17. Cohen, Morrel H. & Eliazar, Iddo I., 2013. "Econophysical visualization of Adam Smith’s invisible hand," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(4), pages 813-823.
    18. Mundt, Philipp & Förster, Niels & Alfarano, Simone & Milakovi?, Mishael, 2014. "The real versus the financial economy: A global tale of stability versus volatility," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 8, pages 1-26.
    19. Eliazar, Iddo, 2017. "Inequality spectra," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 469(C), pages 824-847.
    20. Williams, Michael A. & Pinto, Brijesh P. & Park, David, 2015. "Global evidence on the distribution of firm growth rates," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 432(C), pages 102-107.

    More about this item

    Keywords

    Statistical equilibrium; classical competition; maximum entropy; profit rates; firm growth rates; Subbotin distribution; Laplace distribution;

    JEL classification:

    • F01 - International Economics - - General - - - Global Outlook
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • C16 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Econometric and Statistical Methods; Specific Distributions

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