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

Author

Listed:
  • Raphael Bergoeing
  • Norman V. Loayza
  • Facundo Piguillem

Abstract

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.

Suggested Citation

  • Raphael Bergoeing & Norman V. Loayza & Facundo Piguillem, 2015. "The Whole is Greater than the Sum of Its Parts: Complementary Reforms to Address Microeconomic Distortions," Documentos de Trabajo 314, Centro de Economía Aplicada, Universidad de Chile.
  • Handle: RePEc:edj:ceauch:314
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    References listed on IDEAS

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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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    Cited by:

    1. Asturias, Jose & Hur, Sewon & Kehoe, Timothy J. & Ruhl, Kim J., 2016. "The interaction and sequencing of policy reforms," Journal of Economic Dynamics and Control, Elsevier, vol. 72(C), pages 45-66.
    2. Pablo N. D’Erasmo, 2016. "Access to Credit and the Size of the Formal Sector," ECONOMIA JOURNAL, THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION - LACEA, vol. 0(Spring 20), pages 143-199, April.

    More about this item

    Keywords

    firm dynamics; technological adoption; regulatory distortions; economic growth; development gap.;

    JEL classification:

    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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