Institutional Entry Barriers and Technological Innovation

Abstract

In this paper, we examine the effects of institutional entry barriers to new firms on incumbents’ technological innovation. In particular, we investigate the effect of municipal entry threat on incumbents’ technology deployment in the U.S. broadband industry. We exploit geographical variation of alternative entry regimes to capture entry threat and incumbents’ technological innovation. We use a spatial regression discontinuity design for private incumbents’ investment behavior and different entry regimes as sharp cutoffs for municipal entry threat. We find that in markets with these entry barriers incumbents invest less in new technologies. Specifically, we find that the local entry barriers lead to a 29% lower technology adoption rate by cable incumbents because of reduced entry threat. These results imply that institutions that restrict entry of new firms can lead to significantly decreased technological innovation and lower internet quality across local markets, not only by deterring new firms but also by altering incumbents’ strategic considerations.