Power Laws in Firm Size and Openness to Trade: Measurement and Implications
IMF Working Papers, April 1, 2010
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- Power Laws in Firm Size and Openness to Trade: Measurement and Implications
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Bibliographic details
- Authors: Andrei A Levchenko, Julian Di Giovanni, Romain Ranciere
- Published: April 1, 2010
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781455200689.001
Core findings
- Existing estimates of power laws in firm size typically ignore the impact of international trade.
- Using a simple theoretical framework, the authors 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.
- Empirical evidence from a dataset of French firms strongly supports this prediction.
- As a result, existing estimates of power law exponents (used to pin down parameters in theoretical and quantitative models) are systematically lower than the true values if they ignore exporting behavior.
- The paper proposes two simple ways of estimating power law parameters that take explicit account of exporting behavior.
Methodology and data
- The analysis combines a simple theoretical framework with empirical investigation using a dataset of French firms.
- The theoretical result: openness to international trade changes the firm size distribution, creating a difference in the power law exponent between exporters and non-exporters.
- Empirical validation: French firm-level data demonstrate the theoretical prediction is strongly supported by the data.
Implications for estimation and modeling
- Estimates of power law exponents that ignore exporting behavior are biased downward relative to the true values.
- Incorporating exporting behavior into estimation is necessary for accurate calibration of theoretical and quantitative models that rely on firm size distributions.
- The authors provide two practical estimation approaches that explicitly account for exporting behavior (details in the working paper).
Subject classification and keywords
- Subject: Agroindustries, Economic sectors, Exports, International trade
- Keywords: Agroindustries, exporting firm, Exports, firm export, firm size, Firm Size Distribution, firms model, Global, International Trade, orders firm, Power Laws, size distribution, size heterogeneity, WP