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Misallocation, Establishment Size, and Productivity

Listed author(s):
  • Pedro Bento
  • Diego Restuccia

We construct a new dataset using census, survey, and registry data from hundreds of sources to document a clear positive relationship between development and average establishment size in manufacturing across 134 countries. We rationalize this relationship using a standard model of heterogeneous production units that features endogenous entry and productivity investment. The model connects small operational scales to the prevalence in poor countries of higher productivity elasticities of distortions. The model also rationalizes the finding in poor countries of low establishment-level productivity and low aggregate productivity investment. The model provides a tractable framework to decompose the importance of factor misallocation, life-cycle productivity investment, and entry-level productivity in accounting for aggregate productivity differences across countries. A calibrated version of the model implies that when the productivity elasticity of distortions increases from 0.09 in the U.S. to 0.5 in India, aggregate productivity falls by 53 percent and average establishment size by 86 percent. Establishment productivity at entry and factor misallocation roughly account equally for the entire reduction in aggregate productivity, whereas the reduction in life-cycle productivity growth is fully offset by its effect on establishment entry.

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File URL: https://www.economics.utoronto.ca/public/workingPapers/tecipa-557.pdf
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Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-557.

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Length: Unknown pages
Date of creation: 06 Apr 2016
Handle: RePEc:tor:tecipa:tecipa-557
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  1. Bhattacharya, Dhritiman & Guner, Nezih & Ventura, Gustavo, 2011. "Distortions, Endogenous Managerial Skills and Productivity Differences," IZA Discussion Papers 5963, Institute for the Study of Labor (IZA).
  2. Hernan J. Moscoso Boedo & Toshihiko Mukoyama, 2011. "Evaluating the Effects of Entry Regulations and Firing Costs on International Income Differences," Virginia Economics Online Papers 379, University of Virginia, Department of Economics.
  3. Klaus Desmet & Stephen L. Parente, 2009. "The Evolution of Markets and the Revolution of Industry: A Unified Theory of Growth," Development Working Papers 284, Centro Studi Luca d'Agliano, University of Milano.
  4. Tasso Adamopoulos & Diego Restuccia, 2014. "The Size Distribution of Farms and International Productivity Differences," American Economic Review, American Economic Association, vol. 104(6), pages 1667-1697, June.
  5. Peter N. Gal, 2013. "Measuring Total Factor Productivity at the Firm Level using OECD-ORBIS," OECD Economics Department Working Papers 1049, OECD Publishing.
  6. Nicholas Bloom & Aprajit Mahajan & David McKenzie & John Roberts, 2010. "Why Do Firms in Developing Countries Have Low Productivity?," American Economic Review, American Economic Association, vol. 100(2), pages 619-623, May.
  7. Haskel, J & Corrado, C & Jona-Lasinio, C & Iommi, M, 2012. "Intangible capital and growth in advanced economies: measurement methods and comparative results," Working Papers 9913, Imperial College, London, Imperial College Business School.
  8. Poschke, Markus, 2014. "The Firm Size Distribution across Countries and Skill-Biased Change in Entrepreneurial Technology," IZA Discussion Papers 7991, Institute for the Study of Labor (IZA).
  9. 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.
  10. Carol Coorado & Jonathan Haskel & Cecilia Iona Lasinio & Massimiliano Iommi, 2012. "Intangible Capital and Growth Strategies for Advanced Economies: Measurement and Comparative Results," Working Papers LuissLab 12101, Dipartimento di Economia e Finanza, LUISS Guido Carli.
  11. Barseghyan, Levon & DiCecio, Riccardo, 2011. "Entry costs, industry structure, and cross-country income and TFP differences," Journal of Economic Theory, Elsevier, vol. 146(5), pages 1828-1851, September.
  12. Corrado, Carol & Haskel, Jonathan & Iommi, Massimiliano & Jona-Lasinio, Cecilia, 2012. "Intangible Capital and Growth in Advanced Economies: Measurement and Comparative Results," CEPR Discussion Papers 9061, C.E.P.R. Discussion Papers.
  13. Baldwin, John R. & Gu, Wulong & Lafrance, Amelie & Macdonald, Ryan, 2009. "Investment in Intangible Assets in Canada: R&D, Innovation, Brand, and Mining, Oil and Gas Exploration Expenditures," The Canadian Productivity Review 2009026e, Statistics Canada, Economic Analysis.
  14. 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.
  15. Nicolas Ziebarth, 2013. "Are China and India Backwards? Evidence from the 19th Century U.S. Census of Manufactures," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(1), pages 86-99, January.
  16. 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.
  17. Rubini, Loris, 2014. "Innovation and the trade elasticity," Journal of Monetary Economics, Elsevier, vol. 66(C), pages 32-46.
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