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Barriers to Entry and Development

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One of the most challenging questions in economics is why some countries are so much richer than others. In this paper, we assess the role of cross-country differences in barriers to entry. This is motivated by the recent evidence about both their prevalence in the third world and their harmful economic consequences. We construct a growth model with capital in which barriers to entry give monopoly power to insider groups and allow them to extract rents. Our first contribution is to solve the dynamic rent-seeking problem of the insider groups and show that larger barriers reduce TFP, the capital-output ratio, and per-capita GDP and increase the relative price of capital. In other words, our model is consistent with the evidence that poorer countries have lower TFPs and capital-output ratios and higher relative prices of capital. Our second contribution is to take our model to the data and assess quantitatively the aggregate implications of barriers to entry. Our most important finding is that barriers to entry have non-linear effects: while small to medium-sized barriers are harmful, large barriers can have disastrous quantitative effects.

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Paper provided by Department of Economics, W. P. Carey School of Business, Arizona State University in its series Working Papers with number 2167726.

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Handle: RePEc:asu:wpaper:2167726

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  1. McGrattan, Ellen R. & Schmitz, James Jr., 1999. "Explaining cross-country income differences," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 10, pages 669-737 Elsevier.
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Cited by:
  1. David Lagakos, 2009. "Superstores or mom and pops? Technolgy adoption and productivity differences in retail trade," Staff Report 428, Federal Reserve Bank of Minneapolis.
  2. Guner, Nezih & Ventura, Gustavo & Yi, Xu, . "Macroeconomic Implications of Size-Dependent Policies," Open Access publications from Universidad Carlos III de Madrid info:hdl:10016/5088, Universidad Carlos III de Madrid.
  3. Trevor Tombe, 2012. "The Missing Food Problem," Working Papers tt0060, Wilfrid Laurier University, Department of Economics, revised 2012.
  4. Berthold Herrendorf & Akos Valentinyi, 2005. "Which Sectors Make the Poor Countries so Unproductive?," IEHAS Discussion Papers 0519, Institute of Economics, Hungarian Academy of Sciences.
  5. Benjamin Bridgman, 2011. "Competition, Work Rules and Productivity," 2011 Meeting Papers 289, Society for Economic Dynamics.
  6. Lei Fang, 2009. "Entry barriers, competition, and technology adoption," Working Paper 2009-08, Federal Reserve Bank of Atlanta.
  7. Simeon Alder, 2009. "In the Wrong Hands: Complementarities, Resource Allocation, and Aggregate TFP," 2009 Meeting Papers 1265, Society for Economic Dynamics.

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