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Aggregate productivity and the allocation of resources over the business cycle

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  • Sophie Osotimehin

    (UQAM)

Abstract

This paper proposes a novel decomposition of aggregate productivity to evaluate the role of allocative efficiency for the cyclical dynamics of aggregate productivity. The decomposition, which is derived from the aggregation of heterogeneous firm-level production functions, accounts for changes in allocative efficiency, as well as for changes in entry and exit. This approach thereby extends Solow's (1957) growth accounting exercise to a framework with firm heterogeneity and frictions in the allocation of resources across firms. I apply the decomposition to a comprehensive dataset of French manufacturing and service firms, and I find that entry and exit contribute little to the year-on-year variability of sectoral productivity, between-sector allocative efficiency plays a limited role for the volatility of aggregate productivity, whereas within-sector allocative efficiency is countercyclical and tends to reduce the volatility of sectoral productivity. (Copyright: Elsevier)

Suggested Citation

  • Sophie Osotimehin, 2019. "Aggregate productivity and the allocation of resources over the business cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 32, pages 180-205, April.
  • Handle: RePEc:red:issued:18-241
    DOI: 10.1016/j.red.2019.02.003
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    Cited by:

    1. Julian di Giovanni & Andrei A. Levchenko & Isabelle Mejean, 2014. "Firms, Destinations, and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 82(4), pages 1303-1340, July.
    2. Shenoy, Ajay, 2017. "Market failures and misallocation," Journal of Development Economics, Elsevier, vol. 128(C), pages 65-80.
    3. Tuochen Li & Dongri Han & Shaosong Feng & Lei Liang, 2019. "Can Industrial Co-Agglomeration between Producer Services and Manufacturing Reduce Carbon Intensity in China?," Sustainability, MDPI, Open Access Journal, vol. 11(15), pages 1-15, July.
    4. Sophie Osotimehin & Latchezar Popov, 2018. "Misallocation and intersectoral linkages," 2018 Meeting Papers 561, Society for Economic Dynamics.
    5. J. David Brown & Emin Dinlersoz & John S. Earle, 2016. "Does Higher Productivity Dispersion Imply Greater Misallocation?A Theoretical and Empirical Analysis," Working Papers 16-42, Center for Economic Studies, U.S. Census Bureau.
    6. David Zeke & Robert Kurtzman, 2016. "Accounting for Productivity Dispersion over the Business Cycle," 2016 Meeting Papers 482, Society for Economic Dynamics.
    7. In Hwan Jo & Tatsuro Senga, 2016. "Firm Dynamics, Misallocation and Targeted Policies," Working Papers 809, Queen Mary University of London, School of Economics and Finance.
    8. HOSONO Kaoru & TAKIZAWA Miho, 2019. "Dynamic Productivity Decomposition with Allocative Efficiency," Discussion papers 19069, Research Institute of Economy, Trade and Industry (RIETI).
    9. Glenn Magerman & Karolien De Bruyne & Emmanuel Dhyne & Jan Van Hove, 2016. "Heterogeneous firms and the micro origins of aggregate fluctuations," Working Paper Research 312, National Bank of Belgium.
    10. Dardati, Evangelina & Saygili, Meryem, 2020. "Aggregate impacts of cap-and-trade programs with heterogeneous firms," Energy Economics, Elsevier, vol. 92(C).
    11. Thomas Philippon & Ariell Reshef, 2013. "An International Look at the Growth of Modern Finance," Journal of Economic Perspectives, American Economic Association, vol. 27(2), pages 73-96, Spring.
    12. Uchida, Hirofumi, 2020. "Natural selection: A review of studies on firms’ exit and efficiency," MPRA Paper 103938, University Library of Munich, Germany.
    13. Sophie Osotimehin & Latchezar Popov, 2020. "Misallocation and Intersectoral Linkages," Opportunity and Inclusive Growth Institute Working Papers 30, Federal Reserve Bank of Minneapolis.
    14. Russell Cooper & Immo Schott, 2018. "Captial Reallocation and Productivity," 2018 Meeting Papers 121, Society for Economic Dynamics.

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    More about this item

    Keywords

    Aggregate productivity; Allocative efficiency; Business cycle; Resource allocation; entry and exit; Cleansing;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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