Defending Gibrat’s Law as a Long-Run Regularity

Francesca Lotti, Enrico Santarelli and Marco Vivarelli ()

No 2744, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: According to Gibrat’s Law of Proportionate Effect, the growth rate of a given firm is independent of its size at the beginning of the period examined. While earlier studies tended to confirm the Law, more recent research generally rejects it. This paper reconciles these two streams of literature, taking into account the role of market selection and learning in reshaping a given population of firms through time. Consistently with previous studies, we found that Gibrat’s Law has to be rejected ex ante, since smaller firms tend to grow faster than their larger counterparts. However, a significant convergence towards Gibrat-like behavior can be detected ex post. This finding is an indication that market selection “cleans” the original population of firms, so that the resulting industrial “core” does not depart from a Gibrat-like pattern of growth. From a theoretical point of view, this result is consistent with those models based on passive and active learning, and can be seen as a defense of the validity of the Law in the long-run.

Keywords: firm growth; firm survival; firm age; firm size; Gibrat’s Law (search for similar items in EconPapers)
JEL-codes: L11 L26 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2007-04
New Economics Papers: this item is included in nep-bec, nep-ent and nep-tid
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Citations: View citations in EconPapers (23)

Published - published in: Small Business Economics, 2009, 32(1), 31-44

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Journal Article: Defending Gibrat’s Law as a long-run regularity (2009)
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