Density Dependence of Entrepreneurial Dynamics: Competition, Opportunity Cost, or Minimum Efficient Scale?

This paper reports on a new examination of the well-established negative effect of localized density on survival in established industries. We attempt to discriminate between three competing, but not necessarily mutually exclusive, explanations: resource competition, variations in the opportunity costs of entrepreneurship, and geographic variations in minimum efficient scale (MES). We construct a model of firm growth and survival in which each of these potential causes of density dependence has a transparent parametric effect, and we derive six predictions that collectively allow for discriminating empirical tests. Empirical results using confidential geocoded data from the National Longitudinal Survey of Youth consistently favor the opportunity cost mechanism. This paper was accepted by Toby Stuart, entrepreneurship and innovation.