Profits and Economic Development

38 Pages Posted: 16 Mar 2014 Last revised: 10 Apr 2014

See all articles by Dan Schwab

Dan Schwab

Boston University

Eric Werker

Harvard University - Business School (HBS)

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

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: or

Dan Schwab

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

Eric Werker (Contact Author)

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics