CREAT: Census Research Exploration and Analysis Tool

Entry Costs Rise with Growth

October 2024

Written by: Peter J. Klenow, Huiyu Li

Working Paper Number:

CES-24-63

Abstract

Over time and across states in the U.S., the number of firms is more closely tied to overall employment than to output per worker. In many models of firm dynamics, trade, and growth with a free entry condition, these facts imply that the costs of creating a new firm increase sharply with productivity growth. This increase in entry costs can stem from the rising cost of labor used in entry and weak or negative knowledge spillovers from prior entry. Our findings suggest that productivity-enhancing policies will not induce firm entry, thereby limiting the total impact of such policies on welfare.

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:
demand, market, production, productivity growth, growth, gain, labor productivity, labor, monopolistically, productivity estimates, endogenous, employment growth, innovation, expenditure, productivity size, economically, revenue, spillover, gdp, productivity shocks, exogenous, welfare

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Center for Economic Studies, Ordinary Least Squares, Bureau of Economic Analysis, County Business Patterns, Federal Reserve Bank, Federal Reserve System, Census of Manufacturing Firms, Washington University, Generalized Method of Moments, NBER Summer Institute, Census Bureau Disclosure Review Board, Business Dynamics Statistics, Federal Statistical Research Data Center

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