The Entrepreneurial Adjustment Process in Disequilibrium
Andrew E. Burke
Cranfield University - School of Management
Andre J. Van Stel
Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Economics
January 21, 2009
Tinbergen Institute Discussion Paper No. 09-005/3
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.
Number of Pages in PDF File: 35
Keywords: entry, exit, equilibrium, industrial organization, undershooting, overshooting
JEL Classification: B50, J01, L00, L1, L26
Date posted: January 21, 2009
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