Analysing the Distributions of the Stochastic Firm Growth Approach

One of the most interesting issues in economics is the study of industrial dynamics and evolution. Firm size distributions are central when analyzing market structures. The intimate relationship between the firm growth process and the emanating market structures demands attention to firm size distributions and firm growth rate distributions. The stochastic firm growth approach builds on the firm growth rates being normally distributed and size being determined by a first order autoregressive process leaving the size distribution log-normal. The paper analyses these distributional pattern in an impirical context questioning the foundation of the stochastic growth approach. In a cross section analysis of four industries it is shown that neither the foundation nor the outcome of the stochastic firm growth process is empirical regularities. By testing growth rates and log(Size) for normality, reviewing their moments and looking at the plotted data an alternative interpretation is put forward. This interpretation mainly gives reference to industrial evolution, limited effect of heterogeneity on growth rates and the level of disaggregation. JEL classification: C14, L11