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Entry, Exit, and firm Dynamics in Long Run Equilibrium

Hugo A. Hopenhayn

Abstract

This paper develops and analyzes a dynamic stochastic model for a competitive industry which endogenously determines processes for entry and exit and for individual firms' output and employment. The concept of stationary equilibrium is introduced, extending long run industry equilibrium theory to account for entry, exit, and heterogeneity in the size and growth rate of firms. Conditions under which there will be entry and exit in the stationary equilibrium are given. Cross-sectional properties--across size and age cohorts--are analyzed and compared to the data. Implications for the equilibrium distributions of profits and the value of firms are analyzed. The effect of changes in the parameters describing the technological and market conditions of the industry on the equilibrium size distribution and turnover rates are also analyzed.