Defending Gibrat's Law as a Long-Run Regularity

26 Pages Posted: 23 Apr 2007

See all articles by Francesca Lotti

Francesca Lotti

Bank of Italy

Enrico Santarelli

University of Bologna - Department of Economics

Marco Vivarelli

Universita Cattolica del Sacro Cuore, Milano; IZA Institute of Labor Economics

Date Written: April 2007

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: Gibrat's Law, firm size, firm age, firm survival, firm growth

JEL Classification: L11, L26

Suggested Citation

Lotti, Francesca and Santarelli, Enrico and Vivarelli, Marco, Defending Gibrat's Law as a Long-Run Regularity (April 2007). IZA Discussion Paper No. 2744. Available at SSRN: https://ssrn.com/abstract=982168

Francesca Lotti

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

Enrico Santarelli

University of Bologna - Department of Economics ( email )

Piazza Scaravilli, 2
I-40126 Bologna
Italy
+39 051 2098487 (Phone)

HOME PAGE: http://www2.dse.unibo.it/santarel

Marco Vivarelli (Contact Author)

Universita Cattolica del Sacro Cuore, Milano ( email )

Largo Gemelli 1
Milano, 20123
Italy

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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