Defending Gibrat's Law as a Long-Run Regularity

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 article reconciles these two streams of literat...

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Bibliographic Details
Published in:Small business economics 2009-01, Vol.32 (1), p.31-44
Main Authors: Lotti, Francesca, Santarelli, Enrico, Vivarelli, Marco
Format: Article
Language:English
Subjects:
Business and Management
Business growth
Business structures
Communications industries
Correlation analysis
Econometrics
Economic growth
Economic models
Economic theory
Entrepreneurship
Firm theory
Growth rate
Industrial economics
Industrial machinery
Industrial market
Industrial Organization
Law firms
Management
Microeconomics
Population
Population growth
Sampling methods
Size distribution
Size of enterprise
Small and medium sized enterprises
Studies
Telecommunications industry
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Summary: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 article 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 find 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 toward 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.
ISSN:0921-898X
1573-0913
DOI:10.1007/s11187-007-9071-0