Staged Entry

We develop a model of staged entry: to operate, monopolistically competitive firms must pay two sequential entry costs, each time acquiring a more informative signal of future performance.

This model yields two implications for fiscal policy.

First, the equilibrium outcome is constrained-efficient if preferences are CES and entry costs are exogenous.

Second, when entry costs depend on how many firms pass any entry stage (due to positive knowledge spillovers or negative congestion effects) the resulting externalities can be offset via Pigouvian taxes or subsidies that are timed around the relevant entry decisions.

A calibration exercise based on U.S. firm-entry data shows that these policies would raise welfare through a wider pool of entrants and sharper selection of productive firms.