DP7773 Power Laws in Firm Size and Openness to Trade: Measurement and Implications

Author(s): Julian di Giovanni, Andrei A. Levchenko, Romain Rancière
Publication Date: April 2010
Keyword(s): Firm Size Distribution, International Trade, Power Laws
JEL(s): F12, F15
Programme Areas: International Macroeconomics, International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7773

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. 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.