Growth, Entry and Exit of Firms

A dynamic model of industry equilibrium is presented which shows how growth, entry and exit of firms are interrelated. By taking into account the fact that a firm's profitability is to some degree subject to random shocks, the simultaneous occurrence of entry and exit can be explained formally. In addition, by also taking internal growth costs into account, it is shown that excess profits can persist in long-rune quilibrium even in perfect competition and with constant returns to scale. The model is consistent with the facts that industry growth comes mainly from existing firms and that most firms grow at rates which do not systematically depend on their scale of operations.