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The Whole is Greater than the Sum of Its Parts: Complementary Reforms to Address Microeconomic Distortions

Listed author(s):
  • Raphael Bergoeing
  • Norman V. Loayza
  • Facundo Piguillem

This paper links microeconomic rigidities and technological adoption to propose a partial explanation for the observed differences in income per capita across countries. The paper first presents a neoclassical general equilibrium model with heterogeneous production units. It assumes that developing countries do not generate frontier technologies but can adopt them by investing in new capital, which requires firm renewal. The model analyzes how this process can be hindered by barriers to the entry of new investment projects and the exit of obsolete ones. It finds that there are nonlinearities in the way entry and exit barriers operate: Barriers have increasing costs, and they reinforce each other’s negative impact. The paper then calibrates and simulates the model to measure the impact of these barriers on the GDP per capita gap between the U.S. and a large sample of developing countries. It accounts for a range of 26 to 60% of the income gap between the U.S. and 107 developing countries. Most importantly, the model implies that, for the median developing economy, about 50% of the simulated gap is explained by the interaction of entry and exit barriers (and the rest by their individual effects). The paper’s main policy implication is that only comprehensive reforms can have substantial effects, especially when initial distortions are large. If they are too narrow (focusing on only one barrier) or too mild (leaving in place a large distortion), microeconomic reforms are unlikely to have significant effects on aggregate productivity and output growth. JEL: O1, O4.

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File URL: http://www.dii.uchile.cl/~cea/sitedev/cea/www/download.php?file=documentos_trabajo/ASOCFILE120150603103141.pdf
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Paper provided by Centro de Economía Aplicada, Universidad de Chile in its series Documentos de Trabajo with number 314.

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Date of creation: 2015
Handle: RePEc:edj:ceauch:314
Contact details of provider: Web page: http://www.dii.uchile.cl/cea/

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  1. Christiano, Lawrence J, 2002. "Solving Dynamic Equilibrium Models by a Method of Undetermined Coefficients," Computational Economics, Springer;Society for Computational Economics, vol. 20(1-2), pages 21-55, October.
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  3. D׳Erasmo, Pablo N. & Moscoso Boedo, Hernan J. & Şenkal, Aslı, 2014. "Misallocation, informality, and human capital: Understanding the role of institutions," Journal of Economic Dynamics and Control, Elsevier, vol. 42(C), pages 122-142.
  4. Bergoeing, Raphael & Loayza, Norman & Repetto, Andrea, 2004. "Slow recoveries," Journal of Development Economics, Elsevier, vol. 75(2), pages 473-506, December.
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  9. Jeffrey Campbell, 1998. "Entry, Exit, Embodied Technology, and Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(2), pages 371-408, April.
  10. Hopenhayn, Hugo & Rogerson, Richard, 1993. "Job Turnover and Policy Evaluation: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, vol. 101(5), pages 915-938, October.
  11. Diego A. Comin & Martí Mestieri Ferrer, 2013. "If Technology Has Arrived Everywhere, Why has Income Diverged?," NBER Working Papers 19010, National Bureau of Economic Research, Inc.
  12. Pakes, Ariel & Ericson, Richard, 1998. "Empirical Implications of Alternative Models of Firm Dynamics," Journal of Economic Theory, Elsevier, vol. 79(1), pages 1-45, March.
  13. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-1150, September.
  14. Caballero, Ricardo J & Hammour, Mohamad L, 1994. "The Cleansing Effect of Recessions," American Economic Review, American Economic Association, vol. 84(5), pages 1350-1368, December.
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