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Is failure good?
Author(s) -
Knott Anne Marie,
Posen Hart E.
Publication year - 2005
Publication title -
strategic management journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 11.035
H-Index - 286
eISSN - 1097-0266
pISSN - 0143-2095
DOI - 10.1002/smj.470
Subject(s) - externality , market failure , offset (computer science) , economics , industrial organization , banking industry , microeconomics , business , monetary economics , finance , programming language , computer science
Approximately 80–90 percent of new firms ultimately fail. The tendency is to think of this failure as wasteful. We, however, examine whether there are economic benefits to offset the waste. We characterize three potential mechanisms through which excess entry affects market structure, firm behavior, and efficiency, then test them in the banking industry. Results indicate that failed firms generate externalities that significantly and substantially reduce industry cost. On average these benefits exceed the private costs of the entrants. Thus failure appears to be good for the economy. Copyright © 2005 John Wiley & Sons, Ltd.