Is Failure Good?

Strategic Management Journal, Vol. 26, No. 7, July 2005

42 Pages Posted: 15 May 2006

See all articles by Hart E. Posen

Hart E. Posen

University of Wisconsin-Madison

Anne Marie Knott

Washington University in St. Louis - John M. Olin Business School

Abstract

Approximately 80-90 percent of new firms ultimately fail. The tendency is to think of this failure as wasteful. We, however, examine whether there are economic benefits to offset the waste. We characterize three potential mechanisms through which excess entry affects market structure, firm behavior, and efficiency, then test them in the banking industry. Results indicate that failed firms generate externalities that significantly and substantially reduce industry cost. On average these benefits exceed the private costs of the entrants. Thus failure appears to be good for the economy.

Keywords: entry, efficiency, spillovers, selection, competition, failure

Suggested Citation

Posen, Hart E. and Knott, Anne Marie, Is Failure Good?. Strategic Management Journal, Vol. 26, No. 7, July 2005. Available at SSRN: https://ssrn.com/abstract=901472

Hart E. Posen (Contact Author)

University of Wisconsin-Madison ( email )

Madison, WI
United States

HOME PAGE: http://bus.wisc.edu/faculty/hart-posen

Anne Marie Knott

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1156
St. Louis, MO 63130-4899
United States

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