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The Dynamics of Entry and Exit

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  • André van Stel
  • Roy Thurik
  • Dennis Fok
  • Andrew Burke

Abstract

The relation between profits and the number of firms in a market is one of the essential topics in the field of industrial organization. Usually, the relation is modeled in an error-correction framework where profits and/or the number of firms respond to out-of-equilibrium situations. In an out-of-equilibrium situation one or both of these variables deviate from some long-term sustainable level. These models predict that in situations of equilibrium, the number of firms does not change and hence, entry equals exit. Moreover, in equilibrium entry and exit are expected to be equal to zero. These predictions are at odds with real life observations showing that entry and exit levels are significantly positive in all markets of substantial size and that entry and exit levels often differ drastically. In this paper we develop a new model for the relation between profit levels and the number of firms by specifying not only an equation for the equilibrium level of profits in a market but also equations for the equilibrium levels of entry and exit. In our empirical application we show that our entry and exit equations satisfy the usual errorcorrection conditions. We also find that a one-time positive shock to entry or profits has a small but permanent positive effect on both the number of firms and total industry profits.

Suggested Citation

  • André van Stel & Roy Thurik & Dennis Fok & Andrew Burke, 2009. "The Dynamics of Entry and Exit," Scales Research Reports H200907, EIM Business and Policy Research.
  • Handle: RePEc:eim:papers:h200907
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    References listed on IDEAS

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    1. Choi, In, 2001. "Unit root tests for panel data," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 249-272, April.
    2. Carree, Martin & Thurik, Roy, 1994. "The Dynamics of Entry, Exit and Profitability: An Error Correction Approach for the Retail Industry," Small Business Economics, Springer, vol. 6(2), pages 107-116, April.
    3. Pedroni, Peter, 2004. "Panel Cointegration: Asymptotic And Finite Sample Properties Of Pooled Time Series Tests With An Application To The Ppp Hypothesis," Econometric Theory, Cambridge University Press, vol. 20(03), pages 597-625, June.
    4. Thurik, A. Roy & Carree, Martin A. & van Stel, André & Audretsch, David B., 2008. "Does self-employment reduce unemployment?," Journal of Business Venturing, Elsevier, vol. 23(6), pages 673-686, November.
    5. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
    6. Pedroni, Peter, 1999. " Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 653-670, Special I.
    7. Schumpeter, Joseph A., 1947. "Theoretical Problems of Economic Growth," The Journal of Economic History, Cambridge University Press, vol. 7(S1), pages 1-9, January.
    8. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
    9. Maddala, G S & Wu, Shaowen, 1999. " A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 631-652, Special I.
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    Citations

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    Cited by:

    1. Rui Baptista & Vítor Escária & Paulo Madruga, 2008. "Entrepreneurship, regional development and job creation: the case of Portugal," Small Business Economics, Springer, vol. 30(1), pages 49-58, January.
    2. Richard Kneller & Danny McGowan, "undated". "Tax Policy and Firm Entry and Exit Dynamics: Evidence from OECD Countries," Discussion Papers 11/08, University of Nottingham, School of Economics.
    3. Jolanda Hessels & Isabel Grilo & Roy Thurik & Peter Zwan, 2011. "Entrepreneurial exit and entrepreneurial engagement," Journal of Evolutionary Economics, Springer, vol. 21(3), pages 447-471, August.
    4. Richard Kneller & Danny McGowan, "undated". "Entrepreneurship Dynamics, Market Size and Fiscal Policy," Discussion Papers 11/07, University of Nottingham, School of Economics.
    5. André van Stel & Sander Wennekers & Jolanda Hessels & Peter van der Zwan, 2012. "Global Entrepreneurship Monitor 2011 The Netherlands," Scales Research Reports A201211, EIM Business and Policy Research.

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