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Entry Costs Rise with Development

May 2014
Working Paper
Peter Klenow, Albert Bollard, Huiyu Li

A potential benefit of a large market (GDP) is a large number of locally produced varieties. We attempt to quantify the number of varieties produced in a market by counting the number of firms and plants. Looking at manufacturing industries across countries and over time, we find that variety increases strongly with the number of workers and modestly with output per worker. In many models of firm dynamics, trade and growth, these facts imply that the cost of creating a new variety increase sharply with productivity. This increase in entry costs can be due to rising labor costs with development as well as intrinsically higher costs of using more sophisticated technologies. As a result, the welfare impact of productivity enhancing policies appears to be only modestly amplified through variety expansion.

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