The Dynamics of Firm Size Distribution

Abstract

The shape and evolution of firm size distribution has been studied in industrial organization and labor economics. The standard hypothesis of Gibrat’s law of proportionate effect posits that the rate of firm growth is size-independent. We test Gibrat’s law using a new empirical methodology and considering the underinvestigated Brazilian case. Quantile regression is used to estimate the evolution of firm size distribution and to investigate the validity of Gibrat’s law in some parts of the conditional distribution, unlike previous studies, which considered the conditional mean dynamics only. An interesting empirical issue is that usual IV/GMM methods are inappropriate under the null but consistent under the alternative hypothesis, while non-IV methods that impose exogeneity are consistent only under the null hypothesis. Results suggest that Gibrat’s law is rejected; that smaller firms grow faster; and that there seems to be a strong negative asymmetry in conditional distribution as firm size increases.