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The Entrepreneurial Adjustment Process in Disequilibrium

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  • André van Stel
  • Andrew Burke

Abstract

Despite the fact that the main contribution of entrepreneurship theory to economics has been to provide an account of the performance of markets in disequilibrium, little empirical research on entrepreneurship has examined firm entry and exit in this context. In this paper, we attempt to redress this by modelling the interrelationship between firm entry and exit rates in disequilibrium. Using a data base of Dutch retail industries over the period 1980-2001, we are able to distinguish between displacement (entry causing exit) and replacement (exit causing entry) effects. We introduce a new methodological approach which allows us to investigate whether the relations under consideration differ between situations of undershooting’ (the actual number of firms is below the equilibrium number) and ‘overshooting’ (vice versa). We find that the equilibriumrestoring mechanisms are different in these two situations – being faster in over than undershoots. Our estimation results also imply that for undershooting, a lack of competition between incumbent firms contributes to restoration of equilibrium (creating room for new-firm entry) while in overshooting competition induced by new firms (in particular strong displacement) causes the number of firms to move towards equilibrium. The research helps to embed entrepreneurship theory into mainstream economics in a manner that adds greater insight into the performance of markets in disequilibrium.

Suggested Citation

  • André van Stel & Andrew Burke, 2008. "The Entrepreneurial Adjustment Process in Disequilibrium," Scales Research Reports H200809, EIM Business and Policy Research.
  • Handle: RePEc:eim:papers:h200809
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    References listed on IDEAS

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    JEL classification:

    • B50 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - General
    • J01 - Labor and Demographic Economics - - General - - - Labor Economics: General
    • L00 - Industrial Organization - - General - - - General
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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