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 Business School

Date Written: April 3, 2014

Abstract

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: https://ssrn.com/abstract=2409251 or http://dx.doi.org/10.2139/ssrn.2409251

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

Register to save articles to
your library

Register

Paper statistics

Downloads
590
Abstract Views
2,640
rank
44,875
PlumX Metrics