Working Papers LABORatorio R. Revelli

Centre for Employment Studies

Explaining the Distribution of Firm Growth Rates (download)

Giulio Bottazzi *
Angelo Secchi **

Abstract

Recent empirical analyses on aggregated datasets have revealed a common exponential behaviour in the shape of the probability density of the corporate growth rates. In this paper we present clearcut evidence on this topic using more disagregated data.
Then we propose a very simple model, the first to our knowledge, that, under rather general assumptions, provides a robust explanation for the observed regularities. The mechanism is based on the idea that the firm ability of catching new business opportunities increases with the number of opportunities already exploited. A theoretical result is presented for the limiting case in which the number of firms and opportunities go to infinity. Moreover, using simulation, we show that even in a moderately small industry the agreement with asymptotic results is almost complete.

JEL codes: L1, C1, D2

Keywords: Firm growth, Laplace distribution, Urn Processes

* Scuola Superiore S. Anna