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Why Do Inefficient Firms Survive? Management and Economic Development

  • Michael Peters

    (MIT)

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    There are large and persistent productivity differences across firms within narrowly defined industries. This is especially true in poor countries. Why do productivity differences decline as the economy develops? In this paper I propose a theory where productivity differences exist because different firms use different technologies. The negative correlation between economic development and productivity dispersion occurs because the set of economically viable techniques shrinks as the economy develops. My mechanism stresses the role of managerial inputs. If managers are essential to increase the scale of production, inefficient techniques survive in managerial-scarce economies as productive firms do not have the means to replace them. As the aggregate supply of managers increases, efficient firms expand, best-practice technologies dominate the industry and productivity differences decline. Using firm-level panel data from Chile, I test both cross-sectional and time-series implications of the theory and evaluate different approaches of how to introduce management in firms’ production function.

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    File URL: https://www.economicdynamics.org/meetpapers/2012/paper_497.pdf
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    Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 497.

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    Date of creation: 2012
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    Handle: RePEc:red:sed012:497
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    1. Allan Collard-Wexler & John Asker & Jan De Loecker, 2011. "Productivity Volatility and the Misallocation of Resources in Developing Economies," Working Papers 11-13, New York University, Leonard N. Stern School of Business, Department of Economics.
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