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Productivity Volatility and the Misallocation of Resources in Developing Economies

  • Allan Collard-Wexler
  • John Asker
  • Jan De Loecker

We investigate the role of dynamic production inputs and their associated adjustment costs in shaping the dispersion of total factor productivity (TFP) and static measures of capital misallocation within a country. Using data on 5,010 establishments in 33 developing countries from the World Bank's Enterprise Research Data, we find that countries exhibiting greater time-series volatility of productivity are also characterized by greater cross-sectional dispersion in productivity. Volatility in TFP explains one quarter to one third of cross-country productivity dispersion. We document a similar relationship between productivity volatility and the dispersion of the marginal revenue product of capital (static capital misallocation). We then use a standard model of investment with adjustment costs, parameterized using numbers calibrated to U.S. data, to show that increasing the volatility of productivity to the level observed in these developing economies can quantitatively replicate the observed relationship between static misallocation and volatility observed in the data. We find that sixty-one percent of the static capital misallocation in the data is captured by the model's prediction. Our findings suggest that the dynamic process governing productivity shocks is a first-order determinant of differences in misallocation and, hence, income across countries.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17175.

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Date of creation: Jun 2011
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Publication status: published as \Dynamic Inputs and Resource (Mis)Allocation", (joint with John Asker and Jan De Loecker), forthcoming, Journal of Political Economy.
Handle: RePEc:nbr:nberwo:17175
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  1. De Loecker, Jan, 2007. "Do exports generate higher productivity? Evidence from Slovenia," Journal of International Economics, Elsevier, vol. 73(1), pages 69-98, September.
  2. Chang-Tai Hsieh & Peter J. Klenow, 2009. "Misallocation and Manufacturing TFP in China and India," The Quarterly Journal of Economics, MIT Press, vol. 124(4), pages 1403-1448, November.
  3. Caballero, Ricardo J & Pindyck, Robert S, 1996. "Uncertainty, Investment, and Industry Evolution," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(3), pages 641-62, August.
  4. Jan De Loecker & Frederic Warzynski, 2012. "Markups and Firm-Level Export Status," American Economic Review, American Economic Association, vol. 102(6), pages 2437-71, October.
  5. Russell W. Cooper & John C. Haltiwanger, 2006. "On the Nature of Capital Adjustment Costs," Review of Economic Studies, Oxford University Press, vol. 73(3), pages 611-633.
  6. George S Olley & Ariel Pakes, 1992. "The Dynamics Of Productivity In The Telecommunications Equipment Industry," Working Papers 92-2, Center for Economic Studies, U.S. Census Bureau.
  7. Bartelsman, Eric & Haltiwanger, John C. & Scarpetta, Stefano, 2009. "Cross-Country Differences in Productivity: The Role of Allocation and Selection," IZA Discussion Papers 4578, Institute for the Study of Labor (IZA).
  8. Nicholas Bloom, 2009. "The Impact of Uncertainty Shocks," Econometrica, Econometric Society, vol. 77(3), pages 623-685, 05.
  9. Allan Collard-Wexler, 2010. "Productivity Dispersion and Plant Selection in the Ready-Mix Concrete Industry," 2010 Meeting Papers 105, Society for Economic Dynamics.
  10. James Levinsohn & Amil Petrin, 2003. "Estimating Production Functions Using Inputs to Control for Unobservables," Review of Economic Studies, Wiley Blackwell, vol. 70(2), pages 317-341, 04.
  11. Mark Doms & Eric J. Bartelsman, 2000. "Understanding Productivity: Lessons from Longitudinal Microdata," Journal of Economic Literature, American Economic Association, vol. 38(3), pages 569-594, September.
  12. Diego Restuccia & Richard Rogerson, 2007. "Policy Distortions and Aggregate Productivity with Heterogeneous Plants," NBER Working Papers 13018, National Bureau of Economic Research, Inc.
  13. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
  14. Lucia Foster & John Haltiwanger & Chad Syverson, 2005. "Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability?," Working Papers 05-11, Center for Economic Studies, U.S. Census Bureau.
  15. Pinelopi Goldberg & Amit Khandelwal & Nina Pavcnik & Petia Topalova, 2009. "Trade Liberalization and New Imported Inputs," American Economic Review, American Economic Association, vol. 99(2), pages 494-500, May.
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