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Barriers To Entry And Development

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  • Berthold Herrendorf
  • Arilton Teixeira

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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Suggested Citation

  • Berthold Herrendorf & Arilton Teixeira, 2011. "Barriers To Entry And Development," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(2), pages 573-602, May.
    • Handle: RePEc:ier:iecrev:v:52:y:2011:i:2:p:573-602
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    References listed on IDEAS

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    1. 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 431-452, May.
    2. Jose E. Galdon Sanchez & James A. Schmitz, 2003. "Competitive pressure and labor productivity: world iron ore markets in the 1980s," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 27(Spr), pages 9-23.
    3. SchmitzJr, James A., 2001. "Government production of investment goods and aggregate labor productivity," Journal of Monetary Economics, Elsevier, vol. 47(1), pages 163-187, February.
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