ENTRY COSTS, FINANCIAL FRICTIONS, AND CROSS-COUNTRY DIFFERENCES IN INCOME AND TFP

El-hadj Bah and Lei Fang

Macroeconomic Dynamics, 2016, vol. 20, issue 4, 884-908

Abstract: This paper develops a model to assess the quantitative effects of entry costs and financial frictions on cross-country income and total factor productivity (TFP) differences, with a primary focus on the interaction between entry costs and financial frictions. The model is calibrated to match the establishment-level statistics for the U.S. economy, assuming a perfect financial market. The simulations based on the calibrated model show that entry costs and financial frictions together account for 55% and 46% of the cross-country variation in output and TFP in the data. Moreover, a substantial portion of the variation is accounted for by the interaction between entry costs and financial frictions. The main mechanism is that financial frictions amplify the effect of entry costs.

Date: 2016
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Working Paper: Entry cost, financial friction, and cross-country differences in income and TFP (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:cup:macdyn:v:20:y:2016:i:04:p:884-908_00

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