New entries and economic growth

Abstract

The main goal of this paper is to construct a theoretical model that provides an explanation for the relationship between growth and new entry that is consistent with empirical evidence. The model is a four sector endogenous growth model in which there is a technologically advanced and a technologically laggard consumption goods which are imperfect substitutes. The production of each good requires its own stock of human capital and physical capital. The accumulation of physical capital and human capital in each industry is modelled by a Cobb-Douglas production function. The main result of the model is that new entries have a positive effect on the fraction of the existing stock of human capital devoted to the accumulation of human capital in both the advanced and laggard sectors. However, this effect is stronger in the advanced sectors than in the laggard sectors. This result is consistent with empirical evidence.