Rethinking Total Factor Productivity: Beyond the Residual

This paper critiques the conventional interpretation of Total Factor Productivity (TFP) as a residual in macroeconomic growth models, particularly in the Solow framework. Drawing on modern econometric techniques—including fixed effects models, LASSO regularization, and causal forests—I propose a redefinition of TFP as a conditional outcome influenced by institutional, structural, and cultural variables. The analysis reveals that institutional quality significantly shapes productivity, but with heterogeneous and nonlinear effects across countries and income groups. By replacing residual-based assumptions with a context-aware framework, this paper offers a path forward for more precise and policy-relevant productivity modeling.