Entry and exit as a source of aggregate productivity growth in two alternative technological regimes

This paper proposes a neo-Schumpeterian model in order to discuss how the mechanisms of entry and exit contribute to industry productivity growth in alternative technological regimes. Our central hypothesis is that new firms generate gains in aggregate productivity by increasing both the productivity level and competition intensity. By assuming that firms learn about the relevant technology through a variety of sources, and by allowing a continuous flow of entry and exit into the market, our study shows that firm exit and output contraction take mostly place among less productive firms, while output expansion and entry are concentrated among the more efficient ones. The greater is the competitive pressure generated by new entrants, the higher is the expected productivity level of established firms. Overall, our analysis suggests that micro analysis is the proper complement to aggregate industry studies, as it provides a considerable insight into the causes of productivity growth.

Research highlights
► A Nelson-Winter model to analyse the effects of entry on industry productivity growth.
► Key hypothesis: firms entry generate both a direct effect, related to new high-productivity firms, and an indirect effect connected to competitive effect of entry over incumbents.
► The greater is the competitive pressure generated by new entrants, the higher is the expected productivity level of established firms.
► The effects are different across technological regimes.