Productivity Dispersion: Facts, Theory, and Implications

We study productivity dispersions across workers, firms and industrial sectors. Empirical study of data on Japanese firms shows that they all obey the Pareto law, and also that the Pareto index decreases with the level of aggregation. In order to explain these two stylized facts, we propose a theoretical framework built upon the basic principle of statistical physics. In this framework, we employ the concept of superstatistics, which accommodates fluctuations of aggregate demand. Our analysis demonstrates that the allocation of production factors depends crucially on the level of aggregate demand. The frontier of the production possibility set is a never-never land. The higher the level of aggregate demand is, the closer the economy is to the frontier of production possibility set.