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Cross-Country Differences in Productivity: The Role of Allocation and Selection

  • Bartelsman, Eric

    ()

    (VU University Amsterdam)

  • Haltiwanger, John C.

    ()

    (University of Maryland)

  • Scarpetta, Stefano

    ()

    (OECD)

This paper combines different strands of the productivity literature to investigate the effect of idiosyncratic (firm-level) policy distortions on aggregate outcomes. On the one hand, a growing body of empirical research has been relating cross-country differences in key economic outcomes, such as productivity or output per capita, to differences in policies and institutions that shape the business environment. On the other hand, a branch of empirical research has attempted to shed light on the determinants of productivity at the firm-level and the evolution of the distribution of productivity across firms within each industry. In this paper, we exploit a rich source of data with harmonized statistics on firm level variation within industries for a number of countries. Our key empirical finding is that there is substantial variation in the within-industry covariance between size and productivity across countries, and this variation is affected by the presence of idiosyncratic distortions. We develop a model in which heterogeneous firms face adjustment frictions (overhead labor and quasi-fixed capital) and idiosyncratic distortions. We show that the model can be readily calibrated to match the observed cross-country patterns of the within-industry covariance between productivity and size and thus help to explain the observed differences in aggregate performance.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4578.

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Length: 33 pages
Date of creation: Nov 2009
Date of revision:
Publication status: published in: American Economic Review, 2013, 103 (1), 305-334
Handle: RePEc:iza:izadps:dp4578
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