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

Published online by Cambridge University Press:  08 October 2014

El-hadj Bah  and
Lei Fang
El-hadj Bah*
Affiliation:
African Development Bank
Lei Fang
Affiliation:
Federal Reserve Bank of Atlanta
*
Address correspondence to: El-hadj Bah, Development Research Department, African Development Bank, 01 B.P. 1387, Abidjan, Cote d'Ivoire; e-mail: e.bah@afdb.org.
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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.

Keywords

Entry CostsFinancial FrictionsGDP Per CapitaTotal Factor Productivity
Type
Articles
Information
Macroeconomic Dynamics , Volume 20 , Issue 4 , June 2016 , pp. 884 - 908
Copyright
Copyright © Cambridge University Press 2014 

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