A Gap for Me: Entrepreneurs and Entry, Second Version
30 Pages Posted: 30 Sep 2005
Date Written: September 29, 2005
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 since competition is endogenously more intense in larger markets. This result continues to hold when entrepreneurs can export their output to other markets, thereby incurring a unit transport cost or tariff. 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.
Keywords: entrepreneurship, entry, exit, firm turnover, industry dynamics
JEL Classification: L11, L13, M13
Suggested Citation: Suggested Citation
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