Creator: Duncan, George T. and Lin, Lizbie Gee-Sun Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 000 Description:
This paper was published with no issue number.
Keyword: Time series and Entry and exit Subject (JEL): C12 - Hypothesis Testing: General and C32 - Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
Creator: Atkeson, Andrew, Hellwig, Christian, and Ordonez, Guillermo Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 464 Abstract:
In all markets, firms go through a process of creative destruction: entry, random growth and exit. In many of these markets there are also regulations that restrict entry, possibly distorting this process. We study the public interest rationale for entry taxes in a general equilibrium model with free entry and exit of firms in which firm dynamics are driven by reputation concerns. In our model firms can produce high-quality output by making a costly but efficient initial unobservable investment. If buyers never learn about this investment, an extreme “lemons problem” develops, no firm invests, and the market shuts down. Learning introduces reputation incentives such that a fraction of entrants do invest. We show that, if the market operates with spot prices, entry taxes always enhance the role of reputation to induce investment, improving welfare despite the impact of these taxes on equilibrium prices and total production.
Keyword: General equilibrium, Reputation, Creative destruction, Firm dynamics, Entry and exit, and Regulation Subject (JEL): D82 - Asymmetric and Private Information; Mechanism Design, L15 - Information and Product Quality; Standardization and Compatibility, D21 - Firm Behavior: Theory, and L51 - Economics of Regulation