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

Buldyrev, Sergey V. and Pammolli, Fabio and Riccaboni, Massimo and Yamasaki, Kazuko and Fu, Dongfeng and Matia, Kaushik and Stanley, H. Eugene (2006): A Generalized Preferential Attachment Model for Business Firms Growth Rates: II. Mathematical Treatment. Published in: The European Physical Journal B , Vol. 57, No. 2 (May 2007): pp. 131-138.

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 φ = 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 ζ = 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.

• Item Type: MPRA Paper
• Language: English
• Keywords: firm growth, size distribution, Gibrat law, Zipf law
• Subjects: L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L25 - Firm Performance: Size, Diversification, and Scope; D - Microeconomics > D2 - Production and Organizations > D21 - Firm Behavior: Theory; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O47 - Empirical Studies of Economic Growth ; Aggregate Productivity ; Cross-Country Output Convergence; D - Microeconomics > D3 - Distribution > D39 - Other; L - Industrial Organization > L0 - General > L00 - General; L - Industrial Organization > L6 - Industry Studies: Manufacturing > L60 - General; L - Industrial Organization > L6 - Industry Studies: Manufacturing > L65 - Chemicals ; Rubber ; Drugs ; Biotechnology; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L16 - Industrial Organization and Macroeconomics: Industrial Structure and Structural Change ; Industrial Price Indices; E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E17 - Forecasting and Simulation: Models and Applications

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