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Barriers to Entry and Development

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Abstract

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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  • Berthold Herrendorf & Arilton Teixeira, "undated". "Barriers to Entry and Development," Working Papers 2167726, Department of Economics, W. P. Carey School of Business, Arizona State University.
  • Handle: RePEc:asu:wpaper:2167726
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    Cited by:

    1. Nezih Guner & Gustavo Ventura & Xu Yi, 2008. "Macroeconomic Implications of Size-Dependent Policies," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(4), pages 721-744, October.
    2. Berthold Herrendorf & Akos Valentinyi, 2005. "Which Sectors Make the Poor Countries so Unproductive?," IEHAS Discussion Papers 0519, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
    3. Berthold Herrendorf & Todd Schoellman, 2015. "Why is Measured Productivity so Low in Agriculture?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(4), pages 1003-1022, October.
    4. Timothy Kehoe & Sewon Hur & Kim Ruhl & Jose Asturias, 2015. "The Interaction of Entry Barriers and Financial Frictions in Growth," 2015 Meeting Papers 792, Society for Economic Dynamics.
    5. Douglas Gollin & Richard Rogerson, 2014. "Agriculture, Roads, and Economic Development in Uganda," NBER Chapters,in: African Successes, Volume IV: Sustainable Growth, pages 69-110 National Bureau of Economic Research, Inc.
    6. Timothy Kehoe & Sewon Hur & Kim Ruhl & Jose Asturias, 2016. "Firm Entry and Exit and Aggregate Growth," 2016 Meeting Papers 573, Society for Economic Dynamics.
    7. Simeon Alder & David Lagakos & Lee Ohanian, 2014. "Competitive Pressure and the Decline of the Rust Belt: A Macroeconomic Analysis," NBER Working Papers 20538, National Bureau of Economic Research, Inc.
    8. Bah, El-hadj & Fang, Lei, 2015. "Impact of the business environment on output and productivity in Africa," Journal of Development Economics, Elsevier, vol. 114(C), pages 159-171.
    9. Mendoza, Ronald U. & Canare, Tristan A. & Ang, Alvin, 2015. "Doing Business: A Review of Literature and Its Role in APEC 2015," Research Paper Series DP 2015-37, Philippine Institute for Development Studies.
    10. Andrew Atkeson & Christian Hellwig & Guillermo Ordoñez, 2015. "Optimal Regulation in the Presence of Reputation Concerns," The Quarterly Journal of Economics, Oxford University Press, vol. 130(1), pages 415-464.
    11. Simeon Alder, 2009. "In the Wrong Hands: Complementarities, Resource Allocation, and Aggregate TFP," 2009 Meeting Papers 1265, Society for Economic Dynamics.
    12. Bridgman, Benjamin, 2015. "Competition, work rules and productivity," Journal of Economic Dynamics and Control, Elsevier, vol. 52(C), pages 136-149.
    13. Lei Fang, 2009. "Entry barriers, competition, and technology adoption," FRB Atlanta Working Paper 2009-08, Federal Reserve Bank of Atlanta.
    14. El-Hadj Bah & Lei Fang, 2015. "Working Paper - 219 - Impact of the business Environment on Output and Productivity in Africa," Working Paper Series 2159, African Development Bank.
    15. Mendoza, Ronald U. & Canare, Tristan A. & Ang, Alvin, 2015. "Doing Business: A Review of Literature and Its Role in APEC 2015," Discussion Papers DP 2015-37, Philippine Institute for Development Studies.
    16. repec:bla:ecinqu:v:55:y:2017:i:2:p:794-805 is not listed on IDEAS
    17. Diagne, Youssoupha S, 2013. "Impact of business environment on investment and output of manufacturing firms in Senegal," MPRA Paper 54227, University Library of Munich, Germany.
    18. Bento, Pedro, 2014. "Niche firms, mass markets, and income across countries: Accounting for the impact of entry costs," Journal of Economic Dynamics and Control, Elsevier, vol. 48(C), pages 147-158.
    19. Jorge Alvarez, 2017. "The Agricultural Wage Gap: Evidence from Brazilian Micro-data," 2017 Meeting Papers 825, Society for Economic Dynamics.
    20. Ija Trapeznikova & Juan Pablo Rud, 2015. "Wage Dispersion, Job Creation and Development: Evidence from Sub-Saharan Africa," 2015 Meeting Papers 1005, Society for Economic Dynamics.
    21. Manuel García-Santana & Roberto Ramos, 2015. "Distortions and the size distribution of plants: evidence from cross-country data," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 6(3), pages 279-312, August.
    22. David Lagakos, 2009. "Superstores or mom and pops? Technolgy adoption and productivity differences in retail trade," Staff Report 428, Federal Reserve Bank of Minneapolis.
    23. Trevor Tombe, 2012. "The Missing Food Problem," Working Papers tt0060, Wilfrid Laurier University, Department of Economics, revised 2012.
    24. Jiang, Zheng & Shi, Huimin, 2016. "The selection of firms based on productivity: different roles of entry and overhead cost," Economic Modelling, Elsevier, vol. 54(C), pages 537-544.
    25. Lee Ohanian & David Lagakos & Simeon Alder, 2012. "The Decline of the U.S. Rust Belt: A Macroeconomic Analysis," 2012 Meeting Papers 793, Society for Economic Dynamics.

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