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Policy Distortions and Aggregate Productivity with Endogenous Establishment-Level Productivity

Listed author(s):
  • Jose Maria Da-Rocha
  • Marina Mendes Tavares
  • Diego Restuccia

The large differences in income per capita across countries are mostly accounted for by differences in total factor productivity (TFP). What explains these 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 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 they also worsen the distribution of establishment-level productivity. We show that in our model, compared to the model with an exogenous distribution, the quantitative effect of policy distortions is substantially amplified. Whereas empirically-plausible policy distortions in our model generate TFP that is 14 percent that of a benchmark economy with no distortions, with an exogenous distribution the same policy distortions generate TFP that is 86 percent of the benchmark, a 6-fold amplification factor.

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File URL: https://www.economics.utoronto.ca/public/workingPapers/tecipa-523.pdf
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Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-523.

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Length: Unknown pages
Date of creation: 13 Nov 2014
Handle: RePEc:tor:tecipa:tecipa-523
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  1. Nicolas Roys & Francois Gourio, 2013. "Size-Dependent Regulations, Firm Size Distribution, and Reallocation," 2013 Meeting Papers 199, Society for Economic Dynamics.
  2. Omar D. Bello & Juan S. Blyde & Diego Restuccia, 2011. "Venezuela’s Growth Experience," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 48(2), pages 199-226.
  3. Da Rocha Jose Maria & Pujolas Pau Salvador, 2011. "Policy Distortions and Aggregate Productivity: The Role of Idiosyncratic Shocks," The B.E. Journal of Macroeconomics, De Gruyter, vol. 11(1), pages 1-36, November.
  4. Francisco J. Buera & Ezra Oberfield, 2016. "The Global Diffusion of Ideas," NBER Working Papers 21844, National Bureau of Economic Research, Inc.
  5. Guner, Nezih & Parkhomenko, Andrii & Ventura, Gustavo, 2015. "Managers and Productivity Differences," CEPR Discussion Papers 11012, C.E.P.R. Discussion Papers.
  6. Jose-Maria Da-Rocha & Marina Mendes Tavares & Diego Restuccia, 2016. "Firing Costs, Misallocation, and Aggregate Productivity," Working Papers tecipa-561, University of Toronto, Department of Economics.
  7. Jesse Perla & Christopher Tonetti & Jess Benhabib, 2014. "The Growth Dynamics of Innovation, Diffusion, and the Technology Frontier," 2014 Meeting Papers 818, Society for Economic Dynamics.
  8. Pedro Bento & Diego Restuccia, 2016. "Misallocation, Establishment Size, and Productivity," NBER Working Papers 22809, National Bureau of Economic Research, Inc.
  9. Alain Gabler & Markus Poschke, 2013. "Experimentation by Firms, Distortions, and Aggregate Productivity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(1), pages 26-38, January.
  10. Robert E. Hall & Charles I. Jones, 1999. "Why Do Some Countries Produce So Much More Output per Worker than Others?," NBER Working Papers 6564, National Bureau of Economic Research, Inc.
  11. Ranasinghe, Ashantha, 2014. "Impact of policy distortions on firm-level innovation, productivity dynamics and TFP," Journal of Economic Dynamics and Control, Elsevier, vol. 46(C), pages 114-129.
  12. Robert E. Hall & Charles I. Jones, 1999. "Why do Some Countries Produce So Much More Output Per Worker than Others?," The Quarterly Journal of Economics, Oxford University Press, vol. 114(1), pages 83-116.
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