Does the Entry of Firms Contribute to Aggregate Efficiency Growth?

By Asma Raies

English

The effects of new firm entry on the aggregate efficiency growth of industries and countries are still a source of controversy. Indeed, by intensifying competition, the entry of new firms may either enhance or discourage the research and development activity of incumbent firms. Consequently, the growth rate of aggregate efficiency may either increase or decrease. By assuming that new entrants are more efficient than incumbent firms, Aghion et al. (2006) show that the encouragement effect of entry dominates the discouragement one and that entry enhances aggregate efficiency growth. This paper presents a theoretical model which assumes that entrants may be either more or less efficient than incumbent firms. It shows, contrary to Aghion et al. (2006) that the discouraging effect of entry dominates the encouraging one and that entry lowers the aggregate efficiency growth rate. JEL codes: L11, L12, L22, L25, O41

Keywords

  • entry of firms
  • research and development
  • aggregate efficiency
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