Entry Costs, Financial Frictions, and Cross-Country Differences in Income and TFP
El-hadj Bah and Lei Fang
Working Paper 2010-16a
September 2010 (Revised July 2014)
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 percent and 46 percent 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.
JEL classification: O11, O43
Key words: entry costs, financial frictions, GDP per capita, TFP