SIMULTANEOUS APPROACHES TO RATES OF ENTRY AND EXIT IN US MANUFACTURING INDUSTRIES (UNITED STATES)

CHIN-HSIUNG LIN, Fordham University

Abstract

Research on entry and exit remains a primitive art in industrial organization. All the previous studies focus on finding the determinants of entry and exit by using the single-equation regression technique. This approach is contradictory to the traditional structure-conduct-performance causation hypothesis in which structure and conduct are assumed to be the explanatory variables of the industrial performance. Moreover, recent empirical analysis shows that structure, conduct, and performance are closely interrelated. These findings suggest that one has to be cautious in dealing with the causal relationship as simply a unidirectional hypothesis. Noting the above arguments, the model specification of the traditional approach becomes questionable and subject to further investigation.^ This study uses the USEEM data file to calculate the consistent and accurate measurement of the rates of entry and exit. Based on these detailed information, we examine the possible interrelationship among potential entrants and incumbents as well as the exiting firms and the surviving producers. We begin our study with a more extensive examination of the basic equations, concerning entry and exit, in order to obtain the appropriate determinants. We then examine the previous studies in which possible simultaneity may exist. Two-equation and three-equation models of simultaneous equation systems are formulated. Finally, to provide empirical evidence, the simultaneity test and the 3SLS estimating procedure are performed.^ The result of the statistical test on the two-equation model confirms the simultaneous nature of the profit term in the basic equations. This implies that the traditional one-way causation hypothesis is inappropriate since it provides the biased and inconsistent estimates. Further empirical investigation on this area of study may have to estimate both sides' behavior simultaneously in order to reflect on this complicated relationship. ^

Subject Area

Economic theory

Recommended Citation

LIN, CHIN-HSIUNG, "SIMULTANEOUS APPROACHES TO RATES OF ENTRY AND EXIT IN US MANUFACTURING INDUSTRIES (UNITED STATES)" (1987). ETD Collection for Fordham University. AAI8709230.
http://fordham.bepress.com/dissertations/AAI8709230

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