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Profits and Economic Development

Author

Listed:
  • Dan Schwab

    (Boston University)

  • Eric Werker

    (Harvard Business School, Business, Government and the International Economy)

Abstract
Using industry-level manufacturing data, this paper demonstrates a negative effect of rents, measured by the mark-up ratio, on productivity growth. This result is robust to alternate specifications, including an instrumental variables approach. 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 the model, we find that high rents are associated with a slower reduction in tariffs. A country's average mark-up is a strong negative predictor of future economic growth, indicating that we may be measuring a phenomenon of the broader business environment.

Suggested Citation

  • Dan Schwab & Eric Werker, 2014. "Profits and Economic Development," Harvard Business School Working Papers 14-087, Harvard Business School.
    • Handle: RePEc:hbs:wpaper:14-087
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    File URL: http://www.hbs.edu/faculty/pages/download.aspx?name=14-087.pdf
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    References listed on IDEAS

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    Cited by:

    1. Chris Carlson, 2019. "Book Review: The Global Development Crisis," Review of Radical Political Economics, Union for Radical Political Economics, vol. 51(4), pages 693-697, December.

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