Entry Conditions and the Market Value of Capital

This paper presents a model of aggregative investment. In the model, the business sector expands by adding new establishments. Costs of investment are linear but, in the case of net investment, depend upon the risk of entry failure. We can measure the risk, and time-series variations in it, from micro data. We show that average entry-failure rates are sufficiently high that entry risk alone can explain about one-half of the intangible capital stock of the US. Despite linear costs, we show that our model has potentially interesting dynamic implications.