The Growth of Business Firms: Theoretical Framework and Empirical Evidence

Abstract

We introduce a model of proportional growth to explain the distribution of business firm growth rates. The model predicts that the distribution is exponential in the central part and depicts an asymptotic power-law behavior in the tails with an exponent 3. Because of data limitations, previous studies in this field have been focusing exclusively on the Laplace shape of the body of the distribution. In this article, we test the model at different levels of aggregation in the economy, from products to firms to countries, and we find that the model's predictions agree with empirical growth distributions and size-variance relationships.

22 pages, 5 Postscript figures, uses revtex4. to be published in Proc. Natl. Acad. Sci. (2005)

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