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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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    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. 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.
    9. Kaoru Hosono & Miho Takizawa, 2019. "Dynamic Productivity Decomposition with Allocative Efficiency," Working Papers on Central Bank Communication 012, University of Tokyo, Graduate School of Economics.
    10. Uchida, Hirofumi, 2020. "Natural selection: A review of studies on firms’ exit and efficiency," MPRA Paper 103938, University Library of Munich, Germany.
    11. Bertheau, Antoine & Bunzel, Henning & Vejlin, Rune Majlund, 2020. "Employment Reallocation over the Business Cycle: Evidence from Danish Data," IZA Discussion Papers 13681, Institute of Labor Economics (IZA).
    12. Sophie Osotimehin & Latchezar Popov, 2023. "Misallocation and Intersectoral linkages," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 177-198, December.
    13. Russell Cooper & Immo Schott, 2018. "Captial Reallocation and Productivity," 2018 Meeting Papers 121, Society for Economic Dynamics.
    14. Sophie Osotimehin & Latchezar Popov, 2018. "Misallocation and intersectoral linkages," 2018 Meeting Papers 561, Society for Economic Dynamics.
    15. Alpysbayeva, Dinara & Vanormelingen, Stijn, 2022. "Labor market rigidities and misallocation: Evidence from a natural experiment," Labour Economics, Elsevier, vol. 78(C).
    16. 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.
    17. 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.
    18. Sophie Osotimehin & Latchezar Popov, 2020. "Misallocation and Intersectoral Linkages," Working Papers 20-12, Chair in macroeconomics and forecasting, University of Quebec in Montreal's School of Management.
    19. Sophie Osotimehin & Latchezar Popov, 2023. "Misallocation and Intersectoral linkages," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 177-198, December.
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    22. Martin, Philippe & Cros, Mathieu & Epaulard, Anne, 2021. "Will Schumpeter Catch Covid-19?," CEPR Discussion Papers 15834, C.E.P.R. Discussion Papers.

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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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