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Andrei Levchenko is Assistant Professor at the University of Michigan, Ann Arbor. We are grateful to Xavier Gabaix for detailed suggestions, and Michael Aubourg for superb research assistance. This paper was completed while Romain Romain Rancière was visiting INSEE whose hospitality — and in particular the help of Pauline Givord — is gratefully acknowleged.
The fit of this relationship is typically very close. The R2’s reported by Axtell (2001) are in excess of 0.99.
This paper focuses on power law estimation because power laws appear to be the best description of observed firm size distributions (Luttmer 2007). However, the qualitative mechanisms we highlight apply to any other underlying distribution of firm size.
That is, the firm in country n must ship τmn > 1 units to country m in order for one unit of the good to arrive there.
Hanson and Xiang (2008) use U.S. motion picture exports to provide empirical evidence that fixed exporting costs are global rather market-specific.
This value also has an institutional justification: below this sales threshold, firms have the option of filing their information according to simplified reporting requirements, while above it the firms must provide comprehensive accounting data to tax authorities.
This leads to dropping of Construction, Retail Trade, Real Estate, Financial Services, Post and Telecommunications, Business Services, Hotels and Restaurants, Recreational, Cultural, and Athletic Activities, Health and Social Action, Public Administration, and Unions and Extra-Territorial Activities, most of which are plausibly non-tradeable sectors.
We do not report the t-tests for whether the CDF and PDF coefficients are statistically significantly different from each other, as those are “heuristic” estimators without a well-developed statistical model of standard errors. Nonetheless, a simple t-test based on the coefficients and standard errors reported in Table 2 always rejects equality between the CDF and PDF coefficents in Columns (1) compared to (2) and (3) compared to (4).