Working Paper: NBER ID: w26001
Authors: Germn Gutierrez; Thomas Philippon
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.
Keywords: Entry; Exit; Regulation; Lobbying; Tobin's q
JEL Codes: D4; D6; E22; E23; K2; L0; O3; O4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased regulation (G18) | decline in the elasticity of entry with respect to Tobin's q (D25) |
| increased regulation (G18) | decline in entry of small firms relative to large ones (L25) |
| increased lobbying (D72) | more favorable regulations for large firms (L51) |
| increased regulation and increased lobbying (G38) | reduced entry opportunities for smaller competitors (L11) |
| increased regulation (G18) | higher profits for incumbents (D43) |
| regulatory environment captured by large firms (G38) | decline in business dynamism (L16) |