Entry, Exit, and Endogenous Growth

This paper presents an endogenous growth model, in which entry, exit, and growth are endogenously determined through the rational behavior of agents, to investigate the effects of growth-enhancing policies on the exit rate of firms, and on the unemployment rate as well. Unlike standard Schumpeterian growth models, the exit of firms in our model is not simply the result of side effects of entry of newcomers with state-of-the-art technologies, but according to the literature of dynamic industry model, it occurs due to the fact that firms facing heterogeneous productivity shocks. Therefore, the exit rate is influenced by various kinds of economic factors and does not have a simple positive relationship with growth-enhancing policies in our paper. The main results are as follows: a subsidy to entry raises the exit rate. On the other hand, a subsidy to R&D raises growth rates, while the effects on the exit rate depend on the degree of the intertemporal elasticity of substitution.