Profits and Economic Development
38 Pages Posted: 16 Mar 2014 Last revised: 10 Apr 2014
Date Written: April 3, 2014
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.
Keywords: Firm performance, rent, mark-up, competition, manufacturing, economic growth
JEL Classification: L25, O11, O14
Suggested Citation: Suggested Citation