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Entry Costs Rise with Development

Author

Listed:
  • Peter Klenow

    (Stanford University)

  • Huiyu Li

    (Stanford University)

  • Albert Bollard

Abstract

A potential benefit of a large market (GDP) is a large number of locally-produced varieties. We attempt to quantify the number of varieties produced in a market by counting the number of firms and plants. Looking at manufacturing industries across countries and over time, we find that variety increases strongly with the number of workers and modestly with output per worker. In many models of firm dynamics, trade and growth, these facts imply that the cost of creating a new variety increase sharply with productivity. This increase in entry costs can be due to rising labor costs with development as well as intrinsically higher costs of using more sophisticated technologies. As a result, the welfare impact of productivity- enhancing policies appears to be only modestly amplified through variety expansion.

Suggested Citation

  • Peter Klenow & Huiyu Li & Albert Bollard, 2013. "Entry Costs Rise with Development," 2013 Meeting Papers 471, Society for Economic Dynamics.
    • Handle: RePEc:red:sed013:471
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    Cited by:

    1. Joao Ayres & Gajendran Raveendranathan, 2018. "The Firm Dynamics of Business Cycles," Department of Economics Working Papers 2018-16, McMaster University.
    2. Thomas Sampson, 2016. "Dynamic Selection: An Idea Flows Theory of Entry, Trade, and Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 131(1), pages 315-380.
    3. Joao Ayres & Gajendran Raveendranathan, 2023. "Firm Entry and Exit during Recessions," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 47, pages 47-66, January.
    4. Hamano, Masashige, 2015. "International equity and bond positions in a DSGE model with variety risk in consumption," Journal of International Economics, Elsevier, vol. 96(1), pages 212-226.
    5. Joao Ayres & Gajendran Raveendranathan, 2023. "Firm Entry and Exit during Recessions," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 47, pages 47-66, January.
    6. Vivien Lewis & Roland Winkler, 2015. "Product Diversity, Demand Structures, And Optimal Taxation," Economic Inquiry, Western Economic Association International, vol. 53(2), pages 979-1003, April.

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