A Generalized Preferential Attachment Model for Business Firms Growth Rates: II. Mathematical Treatment

Abstract

We present a preferential attachment growth model to obtain the distribution $P(K)$ of number of units $K$ in the classes which may represent business firms or other socio-economic entities. We found that $P(K)$ is described in its central part by a power law with an exponent $\ddot{I}•=2+b/(1-b)$ which depends on the probability of entry of new classes, $b$. In a particular problem of city population this distribution is equivalent to the well known Zipf law. In the absence of the new classes entry, the distribution $P(K)$ is exponential. Using analytical form of $P(K)$ and assuming proportional growth for units, we derive $P(g)$, the distribution of business firm growth rates. The model predicts that $P(g)$ has a Laplacian cusp in the central part and asymptotic power-law tails with an exponent $\hat{I}\P =3$. We test the analytical expressions derived using heuristic arguments by simulations. The model might also explain the size-variance relationship of the firm growth rates.

19 pages 6 figures Applications of Physics in Financial Analysis, APFA5