Economist at Amazon
Job Market Paper "Incumbent's Advantage and the Decline of the Entry Rate" (Apr 21, 2022) Greater incumbent's advantage leads to a faster decline of the entry rate of new firms. However, a constant entry rate can be sustained only if the incumbent's advantage is sufficiently negative. ┗ Slides - Apr 26, 2022 ┗ Recording (20 min) - Nov 15, 2021 (Previously titled: "Selective Accumulation of Ideas: Accounting for the Decline in Entry Rate and Productivity Growth") What are the fundamental determinants of the entry rate of new firms in the long run? Incumbent firms can grow stronger over time for many reasons: including R&D, learning by doing, and preemption of the customer base. If this is indeed the case, it is likely to discourage entry of new firms. However, it is also possible that the new ideas that entrepreneurs bring in improve over time while the incumbents remain stagnant. We can think of this as a "race" between the incumbents and potential entrants. I define the relative speed of improvement between incumbents and potential entrants as the "incumbent's advantage" in a dynamic sense, which can be specific to each industry. Using a simple model, I show that greater incumbent's advantage leads to a faster decline of the entry rate. However, zero incumbent's advantage still implies a declining entry rate due to the "accumulation effect." In other words, a constant entry rate can be sustained only if the incumbent's advantage is sufficiently negative, which is not likely in the majority of industries. A simple, stylized example: If the incumbent's advantage is positive, older cohorts of firms have larger market share than younger cohorts at each point in time, and vice versa. If the incumbent's advantage is zero, all cohorts are sharing the market equally, say, by 1/t. But in each next period (e.g. year), there is one more entry cohort, namely, the new entrants. So the market share of each cohort would decrease from 1/t to 1/(t+1) under zero incumbent's advantage. Therefore the market share of the current entrants decreases at the same rate, and similarly for the entry rate. Previous literature on modeling firm dynamics focuses exclusively on the stationary environment where the entry rate would be constant in the default state of the economy. I show that this implicitly imposes negative incumbent's advantage without recognizing it. Education Ph.D. in economics, University of Wisconsin-Madison (2020) Research Fields Macroeconomics, International Economics; Economic Growth, Firm Dynamics link to my CV link to my Google Scholar profile Contact Information E-mail: dohnlee [at] gmail [dot] com |