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Entry and exit by new versus existing firms

  • Plehn-Dujowich, Jose M.
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    Firms relocating across industries or product lines are empirically relevant in industry dynamics: they account for 22% of exit; and two-thirds of surviving firms alter their product mix every 5 years. Yet, existing theories of industry dynamics focus exclusively on new entrants and assume that firm exit is synonymous with failure. This paper proposes a model that incorporates entry and exit by both new and existing firms into a standard framework of industry dynamics. There are two forms of exit: a firm may shut down by selling its assets to earn their salvage value, or reallocate its assets at a cost to enter another industry or product line. In equilibrium, a low-skill firm shuts down from and a high-skill firm transfers out of an industry with a low state of demand. We show the model is consistent with a series of stylized facts pertaining to the entry and exit patterns of new versus existing firms.

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    Article provided by Elsevier in its journal International Journal of Industrial Organization.

    Volume (Year): 27 (2009)
    Issue (Month): 2 (March)
    Pages: 214-222

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    Handle: RePEc:eee:indorg:v:27:y:2009:i:2:p:214-222
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