Multi-plant Origin of Zipf's Law

Abstract

Zipf's law is a well-known empirical regularity of firm size distribution. To date, it remains a puzzle as to what is the identity of the firms that causes this regularity. We document the multi-plant firm origin of Zipf's law - plants of multi-plant firms (exponent close to one) are more fat-tailed than single-plant firms indicating the dominance of the selection effect at the intensive margin. Extensive margin via aggregation of sales at the firm level plays a less crucial role than the selection effect. A model with modified Gibrat's process can rationalize these findings. Finally, we empirically document that single-plant exporters have a thinner tail than multi-plant non-exporters, negating the role of export identity in explaining fat tails and Zipf's law, in particular.

Keywords: Zipf's law, multi-plant firms, selection effect

JEL Classification: L11, E23, C46, C15