The Political Economy of Entry Barriers∗

We study a political economy model of entry barriers. Each period the policymaker determines whether to impose a high barrier to entry, and the special interest groups try to influence the policymaker’s decision. Entry is accompanied by creative destruction—when many new firms enter, old firms are more likely to be driven out of the market. Therefore the current incumbents (industry leaders) tend to lobby for a higher entry barrier and potential entrants (industry followers) are likely to lobby for a freer environment for entry. We analyze both static and dynamic versions of the model to examine what kind of environment supports a policy that blocks entry. In the dynamic model, the economy can exhibit various different dynamics. In particular, multiple steady states may arise in equilibrium.