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Impact of entry costs on aggregate productivity: financial development matters

Author

Listed:
  • Shaker Akhtekhane, Saeed
Abstract
This paper revisits the question: what is the impact of entry costs on cross-country differences in output and total factor productivity (TFP)? I argue that for the countries with low levels of financial development, the answer is the conventional one in the literature, that higher entry costs cause misallocation of productive factors and lower TFP. However, for countries with reasonably high levels of financial development, the conventional answer does not hold. Motivated by observations on cross-country data, I propose a new theory on the impact of entry costs on TFP. In my mechanism, two competing forces affect TFP when entry cost changes: A wealth-based selection force and a productivity-based selection force. This results in TFP being a hump-shaped function of entry costs. That is, entry costs are not inherently bad for TFP if their target is to deter low productivity individuals from starting businesses. I develop an analytically tractable model of firm dynamics with entry barriers and financial frictions and derive the sufficient conditions for the impact of entry cost on TFP in both wealth- and productivity-based selection phases.

Suggested Citation

  • Shaker Akhtekhane, Saeed, 2020. "Impact of entry costs on aggregate productivity: financial development matters," MPRA Paper 115221, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:115221
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    File URL: https://mpra.ub.uni-muenchen.de/115221/1/entcost_tfp_ff.pdf
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    References listed on IDEAS

    as
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    1. Mohsen Mohaghegh & A. S. Valipour, 2021. "Triggering Economic Growth:Trade Liberalization as the Prominent Factor in Less-developed Countries," Business and Economic Research, Macrothink Institute, vol. 11(2), pages 252-265, June.

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    More about this item

    Keywords

    entry costs; financial development; TFP;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

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