Firm entry and aggregate efficiency growth: An optimal dynamic Program of entry and R&D investment

The effect of entry on the aggregate efficiency growth is still theoretically and empirically unresolved. Many studies focused on this effect in short and long-run, without considering the dynamic transition and how do entry affect the convergence of the industry toward its long-run equilibrium? This paper aims to provide an answer and to fill this gap by employing optimal control principles. Our model exhibits saddle-path stability and shows that the effect of entry and entry liberalizing policy (reducing the entry cost) on the aggregate efficiency growth may be positive, negative or nil depending on the industry's initial characteristics (size and R&D). This theoretical result can justify the inconclusive current empirical evidence. [PUBLICATION ABSTRACT]