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Barriers to Entry and Development

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. Mankiw, N Gregory & Romer, David & Weil, David N, 1992. "A Contribution to the Empirics of Economic Growth," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 407-37, May.
  2. Narayana R. Kocherlakota, 2001. "Building blocks for barriers to riches," Staff Report 288, Federal Reserve Bank of Minneapolis.
  3. Daniel Traca, 2001. "Quantitative restrictions, market power and productivity growth," ULB Institutional Repository 2013/9235, ULB -- Universite Libre de Bruxelles.
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  5. Hendricks, Lutz, . "Equipment Investment and Growth In Developing Countries," Working Papers 97/5, Arizona State University, Department of Economics.
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  8. Clark, Gregory, 1987. "Why Isn't the Whole World Developed? Lessons from the Cotton Mills," The Journal of Economic History, Cambridge University Press, vol. 47(01), pages 141-173, March.
  9. Krueger, Alan B & Summers, Lawrence H, 1988. "Efficiency Wages and the Inter-industry Wage Structure," Econometrica, Econometric Society, vol. 56(2), pages 259-93, March.
  10. Francisco Alcalá & Antonio Ciccone, 2004. "Trade and Productivity," The Quarterly Journal of Economics, MIT Press, vol. 119(2), pages 612-645, May.
  11. Douglas Gollin, 2001. "Getting Income Shares Right," Department of Economics Working Papers 2001-11, Department of Economics, Williams College.
  12. Jose E. Galdon-Sanchez & James A. Schmitz, Jr., 2003. "Competitive pressure and labor productivity: world iron ore markets in the 1980s," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 9-23.
  13. Daron Acemoglu & Fabrizio Zilibotti, 2001. "Productivity Differences," The Quarterly Journal of Economics, MIT Press, vol. 116(2), pages 563-606, May.
  14. Peter Klenow & Andrés Rodríguez-Clare, 1997. "The Neoclassical Revival in Growth Economics: Has It Gone Too Far?," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 73-114 National Bureau of Economic Research, Inc.
  15. Echevarria, Cristina, 1997. "Changes in Sectoral Composition Associated with Economic Growth," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(2), pages 431-52, May.
  16. James Harrigan, 1998. "Estimation of cross-country differences in industry production functions," Staff Reports 36, Federal Reserve Bank of New York.
  17. Prescott, Edward C, 1998. "Needed: A Theory of Total Factor Productivity," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(3), pages 525-51, August.
  18. Francesco Caselli & Wilbur John Coleman II, 2000. "The World Technology Frontier," NBER Working Papers 7904, National Bureau of Economic Research, Inc.
  19. Chang-Tai Hsieh & Peter J. Klenow, 2003. "Relative Prices and Relative Prosperity," NBER Working Papers 9701, National Bureau of Economic Research, Inc.
  20. Cozzi Guido & Palacios Luis-Felipe, 2003. "Parente and Prescott's Theory May Work in Practice But Does Not Work in Theory," The B.E. Journal of Macroeconomics, De Gruyter, vol. 3(1), pages 1-7, August.
  21. Restuccia, Diego & Urrutia, Carlos, 2001. "Relative prices and investment rates," Journal of Monetary Economics, Elsevier, vol. 47(1), pages 93-121, February.
  22. Jones, Charles I., 1994. "Economic growth and the relative price of capital," Journal of Monetary Economics, Elsevier, vol. 34(3), pages 359-382, December.
  23. James A. Schmitz, Jr., 1997. "Government production of investment goods and aggregate labor productivity," Staff Report 240, Federal Reserve Bank of Minneapolis.
  24. Ellen R. McGrattan & James A. Schmitz, Jr., 1998. "Explaining cross-country income differences," Staff Report 250, Federal Reserve Bank of Minneapolis.
  25. Robert E. Hall & Charles I. Jones, 1999. "Why Do Some Countries Produce So Much More Output per Worker than Others?," NBER Working Papers 6564, National Bureau of Economic Research, Inc.
  26. Herrendorf, Berthold & Teixeira, Arilton, 2002. "How Trade Policy Affects Technology Adoption and Productivity," CEPR Discussion Papers 3486, C.E.P.R. Discussion Papers.
  27. Thomas J. Holmes & James A. Schmitz, Jr., 1994. "Resistance to technology and trade between areas," Staff Report 184, Federal Reserve Bank of Minneapolis.
  28. Thomas J. Holmes & James A. Schmitz, Jr., 1995. "Resistance to new technology and trade between areas," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-17.
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