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

Abstract

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. By assuming a) that firms learn about the technology through a variety of sources, and b) a continuous flow of entry and exit, our numerical simulation exercise does show that exits and contraction take mostly place among less productive firms, while entry and expansion are concentrated among the more efficient ones. We were also able to replicate the fact that the entry-exit effect is larger in the entrepreneurial regime, while the contribution of continuing firms is larger in the routinized regime. Our model was thus very effective in replicating some major empirical regularities of industry dynamics, including the very prominent role of entry and exit in productivity growth. Our analysis also suggests that micro analysis is the proper complement to aggregate industry studies, as it provides a considerable insight into the causes of productivity growth.