Profits and Economic Development

Dan Schwab () and Eric Werker ()
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Dan Schwab: Boston University
Eric Werker: Harvard Business School, Business, Government and the International Economy

No 14-087, Harvard Business School Working Papers from Harvard Business School

Abstract: Using industry-level manufacturing data, this paper demonstrates a negative effect of rents, measured by the mark-up ratio, on productivity growth. This result is robust to alternate specifications, including an instrumental variables approach. The negative effect is strongest in poor countries, suggesting that high profits stymie economic development rather than enable it. Consistent with the rent-seeking mechanism of the model, we find that high rents are associated with a slower reduction in tariffs. A country's average mark-up is a strong negative predictor of future economic growth, indicating that we may be measuring a phenomenon of the broader business environment.

Pages: 41 pages
Date: 2014-03
New Economics Papers: this item is included in nep-eff
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Citations: View citations in EconPapers (1)

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