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Productivity Volatility and the Misallocation of Resources in Developing Economies

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  • Allan Collard-Wexler
  • John Asker
  • Jan De Loecker

Abstract

We investigate the role of dynamic production inputs and their associated adjustment costs in shaping the dispersion of total factor productivity (TFP) and static measures of capital misallocation within a country. Using data on 5,010 establishments in 33 developing countries from the World Bank’s Enterprise Research Data, we find that countries exhibiting greater time-series volatility of productivity are also characterized by greater cross-sectional dispersion in productivity. Volatility in TFP explains one quarter to one third of cross-country productivity dispersion. We document a similar relationship between productivity volatility and the dispersion of the marginal revenue product of capital (static capital misallocation). We then use a standard model of investment with adjustment costs, parameterized using numbers calibrated to U.S. data, to show that increasing the volatility of productivity to the level observed in these developing economies can quantitatively replicate the observed relationship between static misallocation and volatility observed in the data. We find that sixty-one percent of the static capital misallocation in the data is captured by the model’s prediction. Our findings suggest that the dynamic process governing productivity shocks is a first-order determinant of differences in misallocation and, hence, income across countries.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17175.

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Date of creation: Jun 2011
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Publication status: published as \Dynamic Inputs and Resource (Mis)Allocation", (joint with John Asker and Jan De Loecker), forthcoming, Journal of Political Economy.
Handle: RePEc:nbr:nberwo:17175

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  1. Allan Collard-Wexler, 2011. "Productivity Dispersion and Plant Selection in the Ready-Mix Concrete Industry," Working Papers 11-25, Center for Economic Studies, U.S. Census Bureau.
  2. Caballero, Ricardo J. & Pindyck, Robert S., 1992. "Uncertainty, investment, and industry evolution," Working papers 3460-92., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  3. Chang-Tai Hsieh & Peter Klenow, 2009. "Misallocation and Manufacturing TFP in China and India," Working Papers 09-04, Center for Economic Studies, U.S. Census Bureau.
  4. Russell W. Cooper & John C. Haltiwanger, 2000. "On the Nature of Capital Adjustment Costs," NBER Working Papers 7925, National Bureau of Economic Research, Inc.
  5. Jan De Loecker & Frederic Warzynski, 2009. "Markups and firm-level export status," NBER Working Papers 15198, National Bureau of Economic Research, Inc.
  6. Olley, G Steven & Pakes, Ariel, 1996. "The Dynamics of Productivity in the Telecommunications Equipment Industry," Econometrica, Econometric Society, Econometric Society, vol. 64(6), pages 1263-97, November.
  7. Jan De Loecker, 2004. "Do Exports Generate Higher Productivity? Evidence from Slovenia," LICOS Discussion Papers, LICOS - Centre for Institutions and Economic Performance, KU Leuven 15104, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
  8. Eric Bartelsman & John Haltiwanger & Stefano Scarpetta, 2013. "Cross-Country Differences in Productivity: The Role of Allocation and Selection," American Economic Review, American Economic Association, vol. 103(1), pages 305-34, February.
  9. Mark Doms & Eric J. Bartelsman, 2000. "Understanding Productivity: Lessons from Longitudinal Microdata," Journal of Economic Literature, American Economic Association, vol. 38(3), pages 569-594, September.
  10. Lucia Foster & John Haltiwanger & Chad Syverson, 2005. "Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability?," Working Papers 05-11, Center for Economic Studies, U.S. Census Bureau.
  11. Nicholas Bloom, 2009. "The Impact of Uncertainty Shocks," Econometrica, Econometric Society, Econometric Society, vol. 77(3), pages 623-685, 05.
  12. Diego Restuccia & Richard Rogerson, 2008. "Policy Distortions and Aggregate Productivity with Heterogeneous Plants," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(4), pages 707-720, October.
  13. James Levinsohn & Amil Petrin, 2003. "Estimating Production Functions Using Inputs to Control for Unobservables," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 70(2), pages 317-341, 04.
  14. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
  15. Pinelopi Goldberg & Amit Khandelwal & Nina Pavcnik & Petia Topalova, 2009. "Trade Liberalization and New Imported Inputs," American Economic Review, American Economic Association, vol. 99(2), pages 494-500, May.
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Cited by:
  1. Michael Peters, 2013. "Heterogeneous mark-ups, growth and endogenous misallocation," LSE Research Online Documents on Economics 54254, London School of Economics and Political Science, LSE Library.
  2. Andrea Pozzi & Fabiano Schivardi, 2012. "Demand or productivity: What determines firm growth?," EIEF Working Papers Series 1211, Einaudi Institute for Economics and Finance (EIEF), revised Oct 2012.
  3. Amit Gandhi & Salvador Navarro & David Rivers, 2011. "On the Identification of Production Functions: How Heterogeneous is Productivity?," University of Western Ontario, CIBC Centre for Human Capital and Productivity Working Papers, University of Western Ontario, CIBC Centre for Human Capital and Productivity 20119, University of Western Ontario, CIBC Centre for Human Capital and Productivity.
  4. Allan Collard-Wexler & Jan De Loecker, 2013. "Reallocation and Technology: Evidence From The U.S. Steel Industry," Working Papers 13-06, Center for Economic Studies, U.S. Census Bureau.
  5. Chris Edmond & Virgiliu Midrigan & Daniel Yi Xu, 2012. "Competition, Markups, and the Gains from International Trade," NBER Working Papers 18041, National Bureau of Economic Research, Inc.
  6. Diego Restuccia & Richard Rogerson, 2013. "Misallocation and productivity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(1), pages 1-10, January.
  7. Michael Peters, 2012. "Why Do Inefficient Firms Survive? Management and Economic Development," 2012 Meeting Papers, Society for Economic Dynamics 497, Society for Economic Dynamics.
  8. Benjamin Moll & Robert M. Townsend & Victor Zhorin, 2013. "Financial Obstacles and Inter-Regional Flow of Funds," NBER Working Papers 19618, National Bureau of Economic Research, Inc.
  9. Joel M. David & Hugo A. Hopenhayn & Venky Venkateswaran, 2014. "Information, Misallocation and Aggregate Productivity," NBER Working Papers 20340, National Bureau of Economic Research, Inc.
  10. Zheng (Michael) Song & Guiying (Laura) Wu, 2013. "A Structural Estimation on Capital Market Distortions in Chinese Manufacturing," Economic Growth centre Working Paper Series, Nanyang Technolgical University, School of Humanities and Social Sciences, Economic Growth centre 1306, Nanyang Technolgical University, School of Humanities and Social Sciences, Economic Growth centre.

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