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Firm Entry with an Imperfect Labor Market

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  • Johnson Justin P.

    () (Cornell University)

Abstract

An economy is considered in which new firms require time to learn whether they will grow in size and profitability in the long run. The labor market is imperfectly competitive. I show that inefficient levels of firm entry will generally exist. Whether under or over entry occurs is tightly related to the bargaining power of labor, but the logic behind my result differs dramatically from other work which has identified a similar link. The theory may shed some light on the continuing debate over the contribution of small firms to economic growth, and suggests that, in some cases, subsidizing small firms may be socially beneficial.

Suggested Citation

  • Johnson Justin P., 2005. "Firm Entry with an Imperfect Labor Market," The B.E. Journal of Macroeconomics, De Gruyter, vol. 5(1), pages 1-25, June.
  • Handle: RePEc:bpj:bejmac:v:topics.5:y:2005:i:1:n:12
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    References listed on IDEAS

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    1. Casey B. Mulligan & Xavier Sala-i-Martin, 1993. "Transitional Dynamics in Two-Sector Models of Endogenous Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 108(3), pages 739-773.
    2. Benhabib Jess & Perli Roberto, 1994. "Uniqueness and Indeterminacy: On the Dynamics of Endogenous Growth," Journal of Economic Theory, Elsevier, vol. 63(1), pages 113-142, June.
    3. Caballe, Jordi & Santos, Manuel S, 1993. "On Endogenous Growth with Physical and Human Capital," Journal of Political Economy, University of Chicago Press, vol. 101(6), pages 1042-1067, December.
    4. Xie Danyang, 1994. "Divergence in Economic Performance: Transitional Dynamics with Multiple Equilibria," Journal of Economic Theory, Elsevier, vol. 63(1), pages 97-112, June.
    5. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
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