Effects of Exit on Growth in an Imperfectly Competitive Economy

Katsuhiko Hori
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Katsuhiko Hori: Institute of Economic Research, Kyoto University
Authors registered in the RePEc Author Service: 堀 勝彦 ()

No 2008-042, Keio/Kyoto Joint Global COE Discussion Paper Series from Keio/Kyoto Joint Global COE Program

Abstract: This paper develops a tractable model for the simultaneous investigation of the exit of firms and economic growth. Using this model, it shows that the existence of exit of firms weakens the positive effects of an intensified product market competition on the growth rate. A more intense product market competition encourages surviving firms to innovate by raising the marginal gain from innovation, while it discourages them to innovate due to raising the possibility of firms to exit the market. This implies that an increase of intensity of competition may reduce the growth rate if it causes too many firms to exit the market. The result contrasts with that of standard creative-destruction models.

Pages: 25 pages
Date: 2008
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