The Failure of Free Entry

German Gutierrez ()

No 14219, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study the entry and exit of firms across U.S. industries over the past 40 years. The elasticity of entry with respect to Tobin’s Q was positive and significant until the late 1990s but declined to zero afterwards. Standard macroeconomic models suggest two potential explanations: rising entry costs or rising returns to scale. We find that neither returns to scale nor technological costs can explain the decline in the Q elasticity of entry, but lobbying and regulations can. We reconcile conflicting results in the literature and show that regulations drive down the entry and growth of small firms relative to large ones, particularly in industries with high lobbying expenditures. We conclude that lobbying and regulations have caused free entry to fail.

Date: 2019-12
New Economics Papers: this item is included in nep-com, nep-ent, nep-his and nep-tid
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