Entry Barriers, Financial Frictions, and Cross-Country Differences in Income and TFP
This paper develops a model to assess the quantitative effects of barriers to entry and financial frictions on cross-country income and TFP differences. The main focus is on the interaction between barriers to entry and financial frictions. The model is calibrated to match the firm level statistics for the U.S. economy assuming a perfect financial market. The quantitative analysis shows that barriers to entry and financial frictions together can explain a factor nine of the differences in income per capita and a factor five of the differences in TFP across countries, and half of the differences are accounted by the interaction between barriers to entry and financial frictions. The main mechanism is that financial frictions amplify the effects of barriers to entry by boosting the effective entry costs.
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