Gibrat's Law as a Long-run Regularity

The purpose of this paper is to provide empirical evidence that Gibrat’s Law may be defended as a long-run (steady state) regularity. This is different from what is generally stated by the literature. In fact, scholars in the ‘90s came to the conclusion that “Gibrat’s Legacy” (Sutton, 1997; Caves, 1998) was defendable not as a general law, but only as a dynamic rule valid for large and mature firms that had attained the MES level of output (see Goddard, McMillan and Wilson 2006), but not for smaller (younger) firms operating at a sub-optimal scale (Geroski, 1995). Here, we try to tell a slightly different story, where the same population of incumbent firms is tracked over time on a yearly base. Instead of observing a given population of firms at a certain time, we track a modifying population of firms over time (on a yearly base), so taking into account exits and growing/shrinking patterns. Our basic hypothesis is that Gibrat’s law should be rejected in general over a given time span, but that convergence towards the law can be detected in the long-term when noisy (Jovanovic) or active (Ericson and Pakes) selection has played its evolutionary role in reshaping the original population through learning, innovation and market selection. Repeating the test of Gibrat’s Law year by year enables us to consider what happens when the original heterogeneous population is gradually reshaped in favour of the most efficient firms.