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Complementarity, Linkages between Firms, and the Effect of Entry Costs on Productivity
Author(s) -
Rio Fernando,
Sampayo Antonio
Publication year - 2017
Publication title -
review of development economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.531
H-Index - 50
eISSN - 1467-9361
pISSN - 1363-6669
DOI - 10.1111/rode.12339
Subject(s) - complementarity (molecular biology) , economics , total factor productivity , elasticity of substitution , productivity , gross output , microeconomics , general equilibrium theory , production (economics) , econometrics , macroeconomics , genetics , biology
In a general equilibrium model where firms are heterogeneous in terms of productivity, we introduce differentiated goods in production that are not perfect substitutes, as well as intermediate inputs needed to produce those goods. We show that an increase in either the complementarity of differentiated goods or the share of intermediate inputs in gross output, significantly increases the negative effect of entry costs on total factor productivity (TFP) and output per worker. We also find that the effect of complementarity is quantitatively stronger. If we assume an empirically plausible value for the elasticity of substitution between differentiated goods, then the model considerably improves its ability to reproduce the observed negative relationship between entry costs and TFP or output per worker.