Asset Pricing with Entry and Imperfect Competition

Forthcoming at the Journal of Finance

Last revision: April 2021

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Abstract:

I study the implications of fluctuations in new firm creation across industries 
on asset prices. I write a general equilibrium model with heterogeneous industries, 
allowing for firm entry and time variation in markups. Firms entering an industry 
increase competition and displace incumbents' monopoly rents. This mechanism is 
strongest in industries that exhibit both a high elasticity of firm entry to 
aggregate fluctuations and a high elasticity of profits to new firm entry. 
I test the model using micro-level data on entry rates and industry portfolios 
and I find the price of entry risk is negative. Industries with more exposure 
to the risk of entry carry a 5.8 percent risk premium. The effect is strongest 
for industries where both the entry and the profit elasticities are high. 
I estimate the model using the simulated method of moments and confirm the 
role of both elasticities in shaping the cross section of industry returns.





Older version 
This draft contains supplementary results in the translog case.
I characterize static and dynamic distortions due to monopolistic competition.



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