Profits and Economic Development

Dan Schwab

Boston University

Eric Werker

Harvard Business School

April 3, 2014

Harvard Business School BGIE Unit Working Paper No. 14-087

Are rents, or excess profits, good for development? Using industry-level manufacturing data, this paper demonstrates a negative effect of rents, measured by the mark-up ratio, on productivity growth. 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 our model, we find that high rents are associated with a slower reduction in tariffs. A country’s average mark-up in manufacturing is a strong negative predictor of future economic growth, indicating that we may be measuring a phenomenon of the broader business environment.

Number of Pages in PDF File: 38

Keywords: Firm performance, rent, mark-up, competition, manufacturing, economic growth

JEL Classification: L25, O11, O14

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Date posted: March 16, 2014 ; Last revised: April 10, 2014

Suggested Citation

Schwab, Dan and Werker, Eric, Profits and Economic Development (April 3, 2014). Harvard Business School BGIE Unit Working Paper No. 14-087. Available at SSRN: http://ssrn.com/abstract=2409251 or http://dx.doi.org/10.2139/ssrn.2409251

Contact Information

Dan Schwab
Boston University ( email )
595 Commonwealth Avenue
Boston, MA 02215
United States
Eric Werker (Contact Author)
Harvard Business School ( email )
Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States
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