Entry Barriers, Competition, and Technology Adoption

Lei Fang
Working Paper 2009-8
March 2009

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There are large differences in income per capita across countries. Growth accounting finds that a large part of the differences comes from the differences in total factor productivity (TFP). This paper explores whether barrier to entry is an important factor for the cross-country differences in TFP. The paper develops a new model to link entry barriers and technology adoption. In the model, higher barriers to entry effectively reduce entry threat, and lower entry threat leads to adoption of less productive technologies. The paper demonstrates that technology adopted in the economy with entry threats is at least as good as the technology adopted in the economy without entry threats. Moreover, the paper presents numerical simulations that suggest entry barriers could be a quantitatively important reason for cross-country differences in TFP and are more harmful to productivity in the countries with monopolists facing inelastic demand.

JEL classification: O11, O43

Key words: entry barriers, technology adoption, total factor productivity

The author thanks her adviser, Richard Rogerson, for his encouragement and guidance. She has also benefited from comments and suggestions of Berthold Herrendorf, Edward C. Prescott, Yan Bai, and seminar participants at Arizona State University, the Federal Reserve Bank of Atlanta, and Southern Methodist University. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.

Please address questions regarding content to Lei Fang, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, GA 30309-4470, 404-498-8057, lei.fang@atl.frb.org.

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