Firm entry has opposing effects on measured TFP through two channels: endogenous markups and economic profits.
In the short-run absence of firm entry, incumbent firms vary their capacity leading to temporary endogenous productivity effects.
Labor responses to technology shocks may overshoot or undershoot their long-run level depending on returns to scale at the firm-level.
Savagar, Anthony (2017). “Firm Dynamics, Dynamic Reallocation, Variable Markups, and Productivity Behaviour” (Old title Explaining Productivity Puzzles with Frictional Firm Entry)
A negative supply-side shock can cause productivity dynamics similar to those observed in the UK post financial crisis. This occurs because firms open capacity in the short run and face weaker competition in the long run.