Working Paper | HBS Working Paper Series | 2014

Profits and Economic Development

by Dan Schwab and Eric Werker

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; Development Economics; Profit; Economic Growth; Renting or Rental;

Citation:

Schwab, Dan, and Eric Werker. "Profits and Economic Development." Harvard Business School Working Paper, No. 14-087, March 2014. (Revised April 2014.)