Defending Gibrat's Law as a Long-run Regularity

Abstract

According to Gibrat's Law of Proportionate\nEffect, the growth rate of a given firm is\nindependent of its size at the beginning of the period\nexamined. While earlier studies tended to confirm the\nLaw, more recent research generally rejects it. This\narticle reconciles these two streams of literature,\ntaking into account the role of market selection and\nlearning in reshaping a given population of firms\nthrough time. Consistently with previous studies, we\nfind that Gibrat's Law has to be rejected ex ante,\nsince smaller firms tend to grow faster than their\nlarger counterparts. However, a significant convergence\ntoward Gibrat-like behavior can be detected ex\npost. This finding is an indication that market\nselection "cleans" the original population of firms,\nso that the resulting industrial "core" does not depart\nfrom a Gibrat-like pattern of growth. From a theoretical\npoint of view, this result is consistent with\nthose models based on passive and active learning,\nand can be seen as a defense of the validity of the\nLaw in the long-run.

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