law of proportionate effect

law of proportionate effect (or Gibrat process)

an explanation of FIRM GROWTH that suggests that the proportionate growth of each firm in a market is random and independent of the size of the firm, so that the ‘chance’ that a firm will grow by a given percentage is the same whatever its size. The randomness of firms’ growth rates is a consequence of the multiple economic and chance factors that influence firms, such as effectiveness of advertising campaigns, successful launch of new products, strikes, effect of exchange rates, etc. The law of proportionate effect predicts that the size inequality of firms will tend to increase over time as a result of chance factors and so will lead to increasing concentration. This will tend to occur even if all firms have the same level of unit costs. Although chance may play some part in a firm's growth or decline, however, modern theories of firm growth (see RESOURCE-BASED THEORY OF THE FIRM) focus more on the part played by firms’ ability to create and sustain COMPETITIVE


Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005
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Chesher, A., 1979, Testing the Law of Proportionate Effect, The Journal of Industrial Economics, 27:403-411.
This study tests whether the organic growth rates of United Kingdom (UK) life insurance firms are independent of size, as predicted by Gibrat's (1931) Law of Proportionate Effects. Using data for 1987-1996 and the three subperiods, 1987-1990, 1990-1993, and 1993-1996, we find that smaller life insurance firms tended to grow faster than larger ones in the 1987-1990 period and that larger life insurers tended to grow faster than smaller ones in the 1990-1993 and 1993-1996 periods.
The overall conclusion arising from most of the prior research is that self-generated corporate growth rates tend to vary randomly across firms and over time, as predicted by Gibrat's Law of Proportionate Effects (Geroski et al., 1997).