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The Entrepreneurial Adjustment Process in Disequilibrium

Tinbergen Institute Discussion Paper No. 09-005/3

35 Pages Posted: 21 Jan 2009  

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

Date Written: January 21, 2009

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

JEL Classification: B50, J01, L00, L1, L26

Suggested Citation

Burke, Andrew E. and van Stel, Andre J., The Entrepreneurial Adjustment Process in Disequilibrium (January 21, 2009). Tinbergen Institute Discussion Paper No. 09-005/3. Available at SSRN: https://ssrn.com/abstract=1330752 or http://dx.doi.org/10.2139/ssrn.1330752

Andrew E. Burke (Contact Author)

Cranfield University - School of Management ( email )

Bedfordshire, MK43 0AL
United Kingdom

HOME PAGE: http://www.som.cranfield.ac.uk/som/faculty/Showfaculty.asp?link=420

Andre J. Van Stel

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Economics ( email )

Kahlaische Strasse 10
D-07745 Jena, 07745
Germany

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