The Dynamics of Business Creation and Exit in Disequilibrium : The USA 1998-2003

Despite the idea of a sustainable/equilibrium number of businesses being at the core of economics, very little empirical analysis has looked at how the adjustment process in disequilibrium works. This paper investigates how business establishment/plant entry and exit are affected by disequilibrium - assessing how these behave when markets over and under shoot and whether these effects differ between high and low turbulence industries. Overall, we find a significant but slow equilibrating process so that the actual number of business establishments is most usually not equal to the equilibrium number even though it gravitates towards it. We uncover a systematic pattern which indicates that in disequilibrium business establishment creation is disequilibrating while exit is equilibrating. The results indicate that entrepreneurs and corporations operate with a herd instinct thereby increasing establishments in an over shoot and decreasing in an under shoot. These results also hold for high and low turbulence industries. In terms of economic policy, the results question whether government policy aimed at promoting new business creation ought to have a counter cyclical dimension in the same way as macroeconomic and monetary policy. In other words, should business start-ups be promoted more strongly in under shoots rather than over shoots?