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The Entrepreneurial Adjustment Process in Disequilibrium

  • André van Stel
  • Andrew Burke

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.

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Paper provided by EIM Business and Policy Research in its series Scales Research Reports with number H200809.

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Length: 36 pages
Date of creation: 24 Jul 2008
Date of revision:
Handle: RePEc:eim:papers:h200809
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  1. De Meza, D. & Southey, C., 1995. "The Borrower's Curse: Optimism, Finance and Enterpreneurship," Discussion Papers 9502, Exeter University, Department of Economics.
  2. Alessandro Barbarino & Boyan Jovanovic, 2004. "Shakeouts and Market Crashes," NBER Working Papers 10556, National Bureau of Economic Research, Inc.
  3. Jack High (ed.), 2001. "Competition," Books, Edward Elgar, number 1751, 6.
  4. Cooper, Arnold C. & Woo, Carolyn Y. & Dunkelberg, William C., 1989. "Entrepreneurship and the initial size of firms," Journal of Business Venturing, Elsevier, vol. 4(5), pages 317-332, September.
  5. Klepper, Steven & Simons, Kenneth L., 2005. "Industry shakeouts and technological change," International Journal of Industrial Organization, Elsevier, vol. 23(1-2), pages 23-43, February.
  6. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
  7. Niels Bosma & Gerrit Wit & Martin Carree, 2005. "Modelling Entrepreneurship: Unifying The Equilibrium and Entry/Exit Approach," Small Business Economics, Springer, vol. 25(1), pages 35-48, 08.
  8. Evans, David S & Jovanovic, Boyan, 1989. "An Estimated Model of Entrepreneurial Choice under Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 808-27, August.
  9. Audretsch, David B. & Baumol, William J. & Burke, Andrew E., 2001. "Competition policy in dynamic markets," International Journal of Industrial Organization, Elsevier, vol. 19(5), pages 613-634, April.
  10. Adam J. Fein, 1998. "Understanding evolutionary processes in non-manufacturing industries: Empirical insights from the shakeout in pharmaceutical wholesaling," Journal of Evolutionary Economics, Springer, vol. 8(3), pages 231-270.
  11. de Meza, David & Webb, David C, 1987. "Too Much Investment: A Problem of Asymmetric Information," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 281-92, May.
  12. Jim Jin & Juan Perote-Peña & Michael Troege, 2004. "Learning by doing, spillovers and shakeouts," Journal of Evolutionary Economics, Springer, vol. 14(1), pages 85-98, January.
  13. Schultz, Theodore W, 1980. " Investment in Entrepreneurial Ability," Scandinavian Journal of Economics, Wiley Blackwell, vol. 82(4), pages 437-48.
  14. repec:cup:cbooks:9780521828130 is not listed on IDEAS
  15. Stuart Fraser & Francis J. Greene, 2006. "The Effects of Experience on Entrepreneurial Optimism and Uncertainty," Economica, London School of Economics and Political Science, vol. 73(290), pages 169-192, 05.
  16. Rui Baptista & Murat Karaoez, 2007. "Turbulence in High Growth and Declining Industries," Jena Economic Research Papers 2007-043, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
  17. Schultz, Theodore W, 1975. "The Value of the Ability to Deal with Disequilibria," Journal of Economic Literature, American Economic Association, vol. 13(3), pages 827-46, September.
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