Abstract This paper presents a dynamic model of entry and exit of firms and plants of firms in a competitive industry with heterogeneous productive units. The model generalizes Houthakker's Cobb-Douglas model to a dynamic setting with firm investment. The model does not justify conventional representative firm approaches to modeling aggregate production technology. Unlike conventional rigid lag models, the derived lag structure in our model depends on the economic history of the industry. Nonetheless, the model is empirically tractable. Estimates of the model on U.S. data indicate that the framework can account for empirically important aspects of industry dynamics of factor demand and output supply.