The Entrepreneurial Adjustment Process in Disequilibrium: Entry and Exit when Markets Under and Over Shoot

Andrew Burke and André van Stel

No 2008-21, CEI Working Paper Series from Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University

Abstract: The main contribution of entrepreneurship theory to economics is to provide an account of market performance in disequilibrium but little empirical research has examined firm entry and exit in this context. We redress this by modelling the interrelationship between firm entry and exit in disequilibrium. Introducing a new methodology we investigate whether this interrelationship differs between market 'undershooting' (the actual number of firms is below the equilibrium number) and 'overshooting' (vice versa). We find that equilibrium-restoring mechanisms are faster in over than in undershoots. The results imply that in undershoots a lack of competition between incumbent firms contributes to restoration of equilibrium (creating room for new-firm entry) while in overshoots competition induced by new firms (in particular strong displacement) helps restore equilibrium.

Keywords: entry; exit; equilibrium; industrial organization; undershooting; overshooting (search for similar items in EconPapers)
JEL-codes: B50 J01 L00 L1 L26 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2009-03
New Economics Papers: this item is included in nep-bec, nep-com, nep-ent, nep-mic and nep-tid
Note: Version: January 2009
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https://hermes-ir.lib.hit-u.ac.jp/hermes/ir/re/29296/WP2008-21.pdf

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Persistent link: https://EconPapers.repec.org/RePEc:hit:hitcei:2008-21

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