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Entry costs, misallocation, and cross-country income and TFP differences

  • Levon Barseghyan
  • Riccardo DiCecio

Entry costs vary dramatically across countries. To assess their impact we construct a model with endogenous entry and operation decisions by firms and calibrate it to match the U.S. distribution of firms by age and size. Higher entry costs lead to greater misallocation of productive factors and lower TFP and output. In the model, countries with entry costs in the lowest decile of the distribution have 2.32 times higher TFP (3.43 in the data) than countries in the highest decile. As in the data, higher entry costs are associated with higher mean and variance of the employment distribution across firms.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2009-005.

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Date of creation: 2009
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Handle: RePEc:fip:fedlwp:2009-005
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