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A Theoretical Foundation for Understanding Firm Size Distributions and Gibrat's Law

Christopher Laincz () and Ana Rodrigues ()

Discussion Papers from Department of Economics, University of York

Abstract: This paper presents a dynamic model of the firm size distribution. Empirical studies of the firm size distribution often compare the moments to a log-normal distribution as implied by Gibrat's Law and note important deviations. Thus, the first, and basic questions we ask are how well does the dynamic industry model reproduce Gibrat's Law and how well does it match the deviations uncovered in the literature. We show that the model reproduces these results when testing the simulated output using the techniques of the empirical literature. We then use the model to study how structural parameters affect the firm size distribution. We find that, among other things, fixed and sunk costs increase both the mean and variance of the firm size distribution while generally decreasing the skewness and kurtosis. The rate of growth in an industry also raises the mean and variance, but has non-monotonic effects on the higher moments.

Keywords: Firm size distribution; Gibrat's Law; R&D. (search for similar items in EconPapers)
JEL-codes: L11 L13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-com and nep-tid
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:yor:yorken:05/34

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