Entry Costs Rise with Growth

Peter J. Klenow and Huiyu Li

Journal of Political Economy Macroeconomics, 2025, vol. 3, issue 1, 43 - 74

Abstract: Over time and across states in the United States, the number of firms is more closely tied to overall employment than to output per worker. In many models of firm dynamics, trade, and growth with a free entry condition, these facts imply that the costs of creating a new firm increase sharply with productivity growth. This increase in entry costs can stem from the rising cost of labor used in entry and weak or negative knowledge spillovers from prior entry. Our findings suggest that productivity-enhancing policies will not induce firm entry, thereby limiting the total impact of such policies on welfare.

Date: 2025
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