The Failure of Free Entry

50 Pages Posted: 26 Jun 2019 Last revised: 19 Jul 2023

See all articles by German Gutierrez Gallardo

German Gutierrez Gallardo

New York University (NYU) - Leonard N. Stern School of Business, Students

Thomas Philippon

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

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Date Written: June 2019

Abstract

We study the entry and exit of firms across U.S. industries over the past 40 years. The elasticity of entry with respect to Tobin’s Q was positive and significant until the late 1990s but declined to zero afterwards. Standard macroeconomic models suggest two potential explanations: rising entry costs or rising returns to scale. We find that neither returns to scale nor technological costs can explain the decline in the Q- elasticity of entry, but lobbying and regulations can. We reconcile conflicting results in the literature and show that regulations drive down the entry and growth of small firms relative to large ones, particularly in industries with high lobbying expenditures. We conclude that lobbying and regulations have caused free entry to fail.

Suggested Citation

Gutierrez Gallardo, German and Philippon, Thomas, The Failure of Free Entry (June 2019). NBER Working Paper No. w26001, Available at SSRN: https://ssrn.com/abstract=3408936

German Gutierrez Gallardo (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business, Students ( email )

NY
United States

Thomas Philippon

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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