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Entry cost, financial friction, and cross-country differences in income and TFP

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  • Lei Fang
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Abstract

This paper develops a model to assess the quantitative effect of entry cost and financial friction on cross-country income and total factor productivity (TFP) differences. The main focus is on the interaction between entry cost and financial friction. The model is calibrated to match establishment-level statistics for the U.S. economy assuming a perfect financial market. The quantitative analysis shows that entry costs and financial frictions together can generate a factor ten of the differences in income per capita and a factor five of the differences in TFP, and a large part of the differences are accounted for by the interaction between entry cost and financial friction. The main mechanism is that financial friction amplifies the effect of entry cost by boosting the effective entry cost.

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File URL: http://www.frbatlanta.org/documents/pubs/wp/wp1016.pdf
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Bibliographic Info

Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 2010-16.

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Date of creation: 2010
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Handle: RePEc:fip:fedawp:2010-16

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  10. Levon Barseghyan & Riccardo DiCecio, 2009. "Entry costs, misallocation, and cross-country income and TFP differences," Working Papers 2009-005, Federal Reserve Bank of St. Louis.
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  12. Veracierto, Marcelo, 2001. "Employment Flows, Capital Mobility, and Policy Analysis," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(3), pages 571-95, August.
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