Entry, Exit, and firm Dynamics in Long Run Equilibrium

TLDR

Long‑run industry equilibrium theory traditionally ignores entry, exit, and firm heterogeneity. The study develops a dynamic stochastic model of a competitive industry that determines entry, exit, and firm growth, and derives conditions for long‑run entry and exit. The authors construct a dynamic stochastic framework that specifies entry, exit, and growth of firms' output and employment, and derives the conditions for long‑run entry and exit. The model yields cross‑sectional implications for profit and firm value distributions, and shows how equilibrium size distribution and turnover rates respond to comparative statics. © 1992 The Econometric Society.

Abstract

A dynamic stochastic model for a competitive industry is developed in which entry, exit, and the growth of firms' output and employment is determined. The paper extends long-run industry equilibrium theory to account for entry, exit, and heterogeneity in the size and growth rate of firms. Conditions under which there is entry and exit in the long run are developed. Cross sectional implications and distributions of profits and value of firms are derived. Comparative statics on the equilibrium size distribution and turnover rates are analyzed. Copyright 1992 by The Econometric Society.