Power Laws in Firm Size and Openness to Trade: Measurement and Implications

By J. D. Giovanni, Andrei A. Levchenko, Romain Rancière. Social Science Research Network, 2010

193 citations recorded by the source corpus.

Existing estimates of power laws in firm size typically ignore the impact of international trade. Using a simple theoretical framework, we show that international trade systematically affects the distribution of firm size: the power law exponent among exporting firms should be strictly lower in absolute value than the power law exponent among non-exporting firms. We use a dataset of French firms to demonstrate that this prediction is strongly supported by the data, both for the economy as a whole and at the industry level. Furthermore, the differences between power law coefficients for exporters and non-exporters are larger in sectors that are more open to trade. While estimates of power law exponents have been used to pin down parameters in theoretical and quantitative models, our analysis implies that the existing estimates are systematically lower than the true values. We propose two simple ways of estimating power law parameters that take explicit account of exporting behavior.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/edf4ff6986696211b7442e29f2793369cfe76355

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Citations in the corpus

Firms, Destinations, and Aggregate Fluctuations (2014, background): “Di Giovanni et al. (2011) use the census of French firms to show that the firm size distribution in France does indeed follow Zipf’s Law.”
Welfare and Trade without Pareto (2014, methodology): “There is a close relationship between the QQ estimator for the Pareto and the familiar log ranksize regressions examined by Gabaix and Ioannides (2004) since both rank, 1 + (n − i), and one minus the empirical CDF are linear in i.”
Firm Sorting and Agglomeration (2018, methodology): “Rossi-Hansberg and Wright (2007a) focus on the role of decreasing returns to scale in determining the shape of the establishment-size distribution, while di Giovanni et al. (2011) consider the role played by endogenous selection into exporting. I focus instead on the role played by location choice. ”
Firm entry, trade, and welfare in Zipf's world (2013, unknown): “We favor this indicator compared to others that measure entry costs either in dollars or in units of per capita income, because in our model fii is a quantity of 15In di Giovanni and Levchenko (2009), as a robustness check, we also computed τij using the estimates of Eaton and Kortum (2002).”
Firms in international trade (2016, background): “As in Dhingra (2013) above, from a neoclassical perspective, the incentives to invest are larger when market size increases. In the traditional firm-heterogeneity context, this has been studied through two primary mechanisms: quality and productivity investment. In Verhoogen (2008), firms invest in ”
In Search of the Armington Elasticity (2014, unknown): “Because country i appeared for T i g periods in the original equation (25), then likewise that country appears for T i g periods in (28), i.”