On the mean/variance relationship of the firm size distribution: Evidence and some theory

Thermodynamics of firms' growth

The distribution of firms' growth and firms' sizes is a topic under intense scrutiny. In this paper, we show that a thermodynamic model based on the maximum entropy principle, with dynamical prior information, can be constructed that adequately describes the dynamics and distribution of firms' growth. Our theoretical framework is tested against a comprehensive database of Spanish firms, which covers, to a very large extent, Spain's economic activity, with a total of 1,155,142 firms evolving along a full decade. We show that the empirical exponent of Pareto's law, a rule often observed in the rank distribution of large-size firms, is explained by the capacity of economic system for creating/destroying firms, and that can be used to measure the health of a capitalist-based economy. Indeed, our model predicts that when the exponent is larger than 1, creation of firms is favoured; when it is smaller than 1, destruction of firms is favoured instead; and when it equals 1 (matching Zipf's law), the system is in a full macroeconomic equilibrium, entailing 'free' creation and/or destruction of firms. For medium and smaller firm sizes, the dynamical regime changes, the whole distribution can no longer be fitted to a single simple analytical form and numerical prediction is required. Our model constitutes the basis for a full predictive framework regarding the economic evolution of an ensemble of firms. Such a structure can be potentially used to develop simulations and test hypothetical scenarios, such as economic crisis or the response to specific policy measures.

Fluctuation scaling, Taylor's law, and crime

Fluctuation scaling relationships have been observed in a wide range of processes ranging from internet router traffic to measles cases. Taylor’s law is one such scaling relationship and has been widely applied in ecology to understand communities including trees, birds, human populations, and insects. We show that monthly crime reports in the UK show complex fluctuation scaling which can be approximated by Taylor’s law relationships corresponding to local policing neighborhoods and larger regional and countrywide scales. Regression models applied to local scale data from Derbyshire and Nottinghamshire found that different categories of crime exhibited different scaling exponents with no significant difference between the two regions. On this scale, violence reports were close to a Poisson distribution (α = 1.057±0.026) while burglary exhibited a greater exponent (α = 1.292±0.029) indicative of temporal clustering. These two regions exhibited significantly different pre-exponential factors for the categories of anti-social behavior and burglary indicating that local variations in crime reports can be assessed using fluctuation scaling methods. At regional and countrywide scales, all categories exhibited scaling behavior indicative of temporal clustering evidenced by Taylor’s law exponents from 1.43±0.12 (Drugs) to 2.094±0081 (Other Crimes). Investigating crime behavior via fluctuation scaling gives insight beyond that of raw numbers and is unique in reporting on all processes contributing to the observed variance and is either robust to or exhibits signs of many types of data manipulation.