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On the Measure of Distortions

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  • Hugo A. Hopenhayn

Abstract

The paper considers formally the mapping from distortions in the allocations of resources across firms to aggregate productivity. TFP gaps are characterized as the integral of a strictly concave function with respect to an employment-weighted measure of distortions. Size related distortions are shown to correspond to a mean preserving spread of this measure, explaining the stronger effects on TFP found in the literature. In general, the effect of correlation between distortions and productivity is shown to be ambiguous; conditions are given to determine its sign. An empirical lower bound on distortions based on size distribution of firms is derived and analyzed, revealing that substantial rank reversals in firm size are necessary for distortions to explain large TFP gaps. The effect of curvature on the impact and measurement of distortions is also considered.

Suggested Citation

  • Hugo A. Hopenhayn, 2014. "On the Measure of Distortions," NBER Working Papers 20404, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:20404
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    References listed on IDEAS

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    Cited by:

    1. Da-Rocha, José-María & Restuccia, Diego & Tavares, Marina Mendes, 2019. "Firing costs, misallocation, and aggregate productivity," Journal of Economic Dynamics and Control, Elsevier, vol. 98(C), pages 60-81.
    2. Timothy Besley & Hannes Mueller, 2018. "Predation, Protection, and Productivity: A Firm-Level Perspective," American Economic Journal: Macroeconomics, American Economic Association, vol. 10(2), pages 184-221, April.
    3. David Rezza Baqaee & Emmanuel Farhi, 2020. "Productivity and Misallocation in General Equilibrium," The Quarterly Journal of Economics, Oxford University Press, vol. 135(1), pages 105-163.
    4. Ayumu Ken Kikkawa & Glenn Magerman & Emmanuel Dhyne, 2019. "Imperfect competition in firm-to-firm trade," Working Paper Research 363, National Bank of Belgium.
    5. Matthias Kehrig & Nicolas Vincent, 2018. "Do Firms Mitigate or Magnify Capital Misallocation? Evidence from Plant-Level Data," 2018 Meeting Papers 233, Society for Economic Dynamics.
    6. Emmanuele Bobbio, 2017. "Tax Evasion, Firm Dynamics and Growth," 2017 Meeting Papers 683, Society for Economic Dynamics.
    7. Emmanuele Bobbio, 2016. "Tax evasion, firm dynamics and growth," Questioni di Economia e Finanza (Occasional Papers) 357, Bank of Italy, Economic Research and International Relations Area.

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    More about this item

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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