DP14219 The Failure of Free Entry
We study the entry and exit of firms across U.S. industries over the past 40 years. The elasticity of entry
with respect to Tobin’s Q was positive and significant until the late 1990s but declined to zero afterwards.
Standard macroeconomic models suggest two potential explanations: rising entry costs or rising returns
to scale. We find that neither returns to scale nor technological costs can explain the decline in the Q elasticity
of entry, but lobbying and regulations can. We reconcile conflicting results in the literature and
show that regulations drive down the entry and growth of small firms relative to large ones, particularly
in industries with high lobbying expenditures. We conclude that lobbying and regulations have caused
free entry to fail.
