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Distortions, efficiency and the size distribution of firms

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  • Goyette, Jonathan
  • Gallipoli, Giovanni

Abstract

We develop a model of firms’ growth in which the tax and credit environments act as selection mechanisms. Such a model, parametrized and validated using a variety of data restrictions, can rationalize observations about input choices and size patterns typical of many developing countries. Using counterfactual experiments, we show that firms’ optimal responses to the tax environment are effective in reducing efficiency losses. As a consequence, tax distortions only account for 13% of the gap in output per worker between an undistorted economy and the benchmark. Credit constraints account for 44% of this gap. However, the interaction between the cost of capital and credit constraints appears to be the most important source of misallocation and can explain up to 85% of the difference in output per worker between the benchmark and first-best.

Suggested Citation

  • Goyette, Jonathan & Gallipoli, Giovanni, 2015. "Distortions, efficiency and the size distribution of firms," Journal of Macroeconomics, Elsevier, vol. 45(C), pages 202-221.
  • Handle: RePEc:eee:jmacro:v:45:y:2015:i:c:p:202-221
    DOI: 10.1016/j.jmacro.2015.04.008
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    Cited by:

    1. Manuel García-Santana, 2013. "Foreign Firms, Distribution of Income, and the Welfare of Developing Countries," 2013 Meeting Papers 1044, Society for Economic Dynamics.
    2. Manuel García-Santana & Josep Pijoan-Mas, 2010. "Small Scale Reservation Laws and the Misallocation of Talent," Working Papers wp2010_1010, CEMFI.
    3. Yuting Li & Tong Chen & Baogui Xin, 2016. "Optimal Financing Decisions of Two Cash-Constrained Supply Chains with Complementary Products," Sustainability, MDPI, Open Access Journal, vol. 8(5), pages 1-17, April.
    4. García-Santana, Manuel & Pijoan-Mas, Josep, 2014. "The reservation laws in India and the misallocation of production factors," Journal of Monetary Economics, Elsevier, vol. 66(C), pages 193-209.

    More about this item

    Keywords

    Growth; Size distribution of firms; Financial frictions; Taxation; Calibration;

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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