 Generalizing Gibrat Reasonable Stochastic Multiplicative Models of Firm Dynamics with Entry and ExitNo 21, LABORatorio R. Revelli Working Papers Series from LABORatorio R. Revelli, Centre for Employment Studies Abstract: Multiplicative models of firm dynamics ‘à la Gibrat’ have become a standard reference in industrial organization. However, some unpleasant properties of their implied dynamics – namely, their explosive or implosive behaviour (firm size and number collapsing to zero or increasing indefinitely) - have been given only very little attention. In this paper I investigate using simulations which modifications to the standard multiplicative model of firm dynamics lead to stable (and reasonable) distributions of firm size. I show that in order to obtain stable systems for a wide range of average growth rate, either heteroskedasticity in the growth rates has to be assumed, or entry and exit mechanisms included. In particular I show that combining the broad class of threshold entry mechanisms and the more restricted class of threshold exit mechanisms with overcapacity penalizing all firms (where entry and exit are determined with reference to an exogenously defined total capacity of the market), lead to stable distributions even in the case of growth rate homoskedasticity, given a non-zero minimum threshold for firm size. Keywords: Firm growth; Gibrat’s Law; Entry; Exit; Simulation. (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:cca:wplabo:21 Access Statistics for this paper More papers in LABORatorio R. Revelli Working Papers Series from LABORatorio R. Revelli, Centre for Employment Studies Contact information at EDIRC. |
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