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Policy Distortions and Aggregate Productivity with Endogenous Establishment-Level Productivity

Author

Listed:
  • Marina Mendes Tavares

    (ITAM and IMF)

  • Diego Restuccia

    (University of Toronto)

  • Jose-Maria Da-Rocha

    (Universidade de Vigo)

Abstract

The large differences in income per capita across countries are mostly explained by differences total factor productivity (TFP). What explains differences in TFP across countries? Evidence suggests that the (mis)allocation of factors of production across heterogenous production units is an important factor. We study factor misallocation across countries in a model with an endogenously determined distribution of establishment-level productivity. In this framework, policy distortions not only misallocate resources across a given set of productive units, but also worsens the distribution of establishment-level productivity as observed in the cross-country data. We show that in this model compared to the model with an exogenously specified distribution of establishment-level productivity, the quantitative effect of a given policy distortion is substantially amplified, by a factor of 2-fold. Moreover, the implications of the model are more in line with cross-country evidence.

Suggested Citation

  • Marina Mendes Tavares & Diego Restuccia & Jose-Maria Da-Rocha, 2014. "Policy Distortions and Aggregate Productivity with Endogenous Establishment-Level Productivity," 2014 Meeting Papers 1196, Society for Economic Dynamics.
    • Handle: RePEc:red:sed014:1196
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    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
    • O5 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies
    • E0 - Macroeconomics and Monetary Economics - - General
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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