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Experimentation by Firms, Distortions, and Aggregate Productivity

Author

Listed:
  • Alain Gabler

    (Swiss National Bank)

  • Markus Poschke

    (McGill University)

Abstract

This paper evaluates the size of these effects when distortions affect not only resource allocation but also the evolution of firm level productivity itself. To this end, we partially endogenize the evolution of firm level productivity in a standard heterogeneous firm model by allowing firms to engage in costly, purposeful experimentation: Firms can engage in risky experiments, which take the form of productivity shocks. Results from failed experiments can be discarded. We then show that endogenous productivity implies up to twice as large effects of productivity-dependent distortions on aggregate consumption. (Copyright: Elsevier)

Suggested Citation

  • Alain Gabler & Markus Poschke, 2013. "Experimentation by Firms, Distortions, and Aggregate Productivity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(1), pages 26-38, January.
  • Handle: RePEc:red:issued:11-62
    DOI: 10.1010/j.red.2012.10.010
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    Cited by:

    1. Ranasinghe, Ashantha, 2017. "Property rights, extortion and the misallocation of talent," European Economic Review, Elsevier, vol. 98(C), pages 86-110.
    2. Pedro Bento & Diego Restuccia, 2017. "Misallocation, Establishment Size, and Productivity," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(3), pages 267-303, July.
    3. Jose Maria Da-Rocha & Marina Mendes Tavares & Diego Restuccia, 2014. "Policy Distortions and Aggregate Productivity with Endogenous Establishment-Level Productivity," Working Papers tecipa-523, University of Toronto, Department of Economics.
    4. Alessandra Bonfiglioli & Rosario Crinò & Gino Gancia, 2015. "Trade, finance and endogenous firm heterogeneity," Economics Working Papers 1502, Department of Economics and Business, Universitat Pompeu Fabra, revised Jul 2017.
    5. Poschke, Markus, 2013. "The Decision to Become an Entrepreneur and the Firm Size Distribution: A Unifying Framework for Policy Analysis," IZA Discussion Papers 7757, Institute for the Study of Labor (IZA).
    6. Diego Restuccia, 2013. "factor misallocation and development," The New Palgrave Dictionary of Economics, Palgrave Macmillan.
    7. Alessandra Bonfiglioli & Rosario Crinò & Gino Gancia, 2014. "Betting on exports: Trade and endogenous heterogeneity," Economics Working Papers 1460, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 2016.
    8. Fornaro, Paolo & Luomaranta, Henri, 2016. "Job Creation and the Role of Dependencies," MPRA Paper 71586, University Library of Munich, Germany.
    9. Stephen Ayerst, 2016. "Idiosyncratic Distortions and Technology Adoption," Working Papers tecipa-571, University of Toronto, Department of Economics.
    10. Dai, Xiaoyong & Cheng, Liwei, 2016. "Market distortions and aggregate productivity: Evidence from Chinese energy enterprises," Energy Policy, Elsevier, vol. 95(C), pages 304-313.
    11. Michele Battisti & Filippo Belloc & Massimo Del Gatto, 2017. "Technology-specific Production Functions," Working Paper series 17-26, Rimini Centre for Economic Analysis.
    12. Kaiji Chen & Alfonso Irarrazabal, 2015. "The Role of Allocative Efficiency in a Decade of Recovery," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(3), pages 523-550, July.
    13. Diego Restuccia, 2018. "Misallocation and Aggregate Productivity across Time and Space," Working Papers tecipa-608, University of Toronto, Department of Economics.
    14. Nezih Guner & Andrii Parkhomenko & Gustavo Ventura, 2018. "Managers and Productivity Differences," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 29, pages 256-282, July.
    15. Maliranta, Mika & Määttänen, Niku, 2013. "Allocation and industry productivity: Accounting for firm turnover," ETLA Working Papers 11, The Research Institute of the Finnish Economy.
    16. Kaiji Chen & Alfonso Irarrazabal, 2015. "The Role of Allocative Efficiency in a Decade of Recovery," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(3), pages 523-550, July.
    17. Javad Sadeghzadeh, 2014. "Innovation Subsidies: Misallocation and Technology Upgrade," 2014 Papers psa1207, Job Market Papers.
    18. Andrea Caggese, 2015. "Financing Constraints, Radical versus Incremental Innovation, and Aggregate Productivity," Working Papers 865, Barcelona Graduate School of Economics.
    19. Hyytinen, Ari & Maliranta, Mika, 2013. "Firm lifecycles and evolution of industry productivity," Research Policy, Elsevier, vol. 42(5), pages 1080-1098.
    20. Fornaro, Paolo & Luomaranta, Henri, 2017. "Small and Medium Firms, Aggregate Productivity and the Role of Dependencies," ETLA Working Papers 47, The Research Institute of the Finnish Economy.
    21. Ranasinghe, Ashantha, 2014. "Impact of policy distortions on firm-level innovation, productivity dynamics and TFP," Journal of Economic Dynamics and Control, Elsevier, vol. 46(C), pages 114-129.

    More about this item

    Keywords

    Aggregate productivity; Firm dynamics; Selection; Experimentation; Entry and exit;

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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