A Gap for Me: Entrepreneurs and Entry

Abstract

We present a theory of entrepreneurial entry and exit decisions. Knowing their own managerial talent, entrepreneurs decide which market to enter, where markets differ in size. We obtain a striking sorting result: each entrant in a large market is more efficient than any entrepreneur in a smaller market. The result obtains since competition is endogenously more intense in larger markets. The sorting and price competition effects imply that the number of entrants (and hence product variety) may actually be smaller in larger markets. In the stochastic dynamic extension of the model, we show that the churning rate of entrepreneurs is higher in larger markets.

Note: An updated version of this paper can be found at: http://ssrn.com/abstract=420980

Keywords: Entrepreneurship, Entry, Exit, Firm Turnover, Industry Dynamics

JEL Classification: L11, L13, M13