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Policy Distortions and Aggregate Productivity: The Role of Idiosyncratic Shocks

Author

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  • Da Rocha Jose Maria

    (Universitat Autonoma de Barcelona and RGEA—Universidade de Vigo)

  • Pujolas Pau Salvador

    (I.D.E.A. and Universitat Autonoma de Barcelona)

Abstract

We consider policy distortions in a model where plants face idiosyncratic productivity shocks that evolve following a Brownian motion. Introducing idiosyncratic shocks into the model implies that plants have non-constant operating profits and as a result there is an endogenous exit margin and incumbent plants must decide in each period whether or not to remain in the industry. By using the forward Kolmogorov equation, we analytically characterize the Stationary Equilibrium. Our main contribution is to show that if a model is being calibrated/estimated without idiosyncratic shocks, where plants face constant productivity over time and the exit rate is exogenous to fit data generated from a model with shocks and endogenous entry, TFP distortions will be overestimated.

Suggested Citation

  • Da Rocha Jose Maria & Pujolas Pau Salvador, 2011. "Policy Distortions and Aggregate Productivity: The Role of Idiosyncratic Shocks," The B.E. Journal of Macroeconomics, De Gruyter, vol. 11(1), pages 1-36, November.
    • Handle: RePEc:bpj:bejmac:v:11:y:2011:i:1:n:35
    DOI: 10.2202/1935-1690.2297
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    References listed on IDEAS

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    1. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    2. Erzo G. J. Luttmer, 2007. "Selection, Growth, and the Size Distribution of Firms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 122(3), pages 1103-1144.
    3. Pablo Andrés Neumeyer & Guido Sandleris, 2010. "Understanding Productivity During the Argentine Crisis," Business School Working Papers 2010-04, Universidad Torcuato Di Tella.
    4. Hugo A. Hopenhayn, 2011. "Firm Microstructure and Aggregate Productivity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 111-145, August.
    5. 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.
    6. Chang-Tai Hsieh & Peter J. Klenow, 2009. "Misallocation and Manufacturing TFP in China and India," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 124(4), pages 1403-1448.
    7. John Asker & Allan Collard-Wexler & Jan De Loecker, 2011. "Productivity volatility and the misallocation of resources in developing economies," Working Papers of Department of Economics, Leuven 507295, KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven.
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    Cited by:

    1. Kaoru HOSONO & Miho TAKIZAWA & Kenta YAMANOUCHI, 2017. "Competition, Uncertainty, and Misallocation," Discussion papers 17071, Research Institute of Economy, Trade and Industry (RIETI).
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    4. Ding, Sai & Jiang, Wei & Li, Shengyu & Wei, Shang-Jin, 2024. "Fiscal policy volatility and capital misallocation: Evidence from China," European Economic Review, Elsevier, vol. 167(C).

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