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Policy Distortions and Aggregate Productivity with Endogenous Establishment-Level Productivity

Author

Listed:
  • Jose-Maria Da-Rocha
  • Marina Mendes Tavares
  • Diego Restuccia

Abstract

The large differences in income per capita across countries are mostly accounted for by differences in total factor productivity (TFP). What explains the differences in TFP across countries? Empirical evidence points to factor misallocation across heterogeneous production units as an important factor. We study factor misallocation in a model where establishment-level productivity is endogenous. In this framework, policy distortions not only misallocate resources across a given set of productive units, but also worsen the productivity distribution of establishments and this effect is substantial quantitatively. Reducing the dispersion in revenue productivity by half to the level of the U.S. benchmark in the model implies an increase in aggregate output and TFP by a factor of 7.8-fold. Improved factor allocation accounts for 38 percent of the gain, whereas the change in the productivity distribution accounts for the remaining 62 percent.

Suggested Citation

  • Jose-Maria Da-Rocha & Marina Mendes Tavares & Diego Restuccia, 2016. "Policy Distortions and Aggregate Productivity with Endogenous Establishment-Level Productivity," Working Papers tecipa-558, University of Toronto, Department of Economics.
  • Handle: RePEc:tor:tecipa:tecipa-558
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    References listed on IDEAS

    as
    1. Pedro Bento & Diego Restuccia, 2017. "Misallocation, Establishment Size, and Productivity," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(3), pages 267-303, July.
    2. José-María Da-Rocha & Marina Mendes Tavares & Diego Restuccia, 2016. "Firing Costs, Misallocation, and Aggregate Productivity," NBER Working Papers 23008, National Bureau of Economic Research, Inc.
    3. Nezih Guner & Andrii Parkhomenko & Gustavo Ventura, 2018. "Managers and Productivity Differences," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 29, pages 256-282, July.
    4. François Gourio & Nicolas Roys, 2014. "Size‐dependent regulations, firm size distribution, and reallocation," Quantitative Economics, Econometric Society, vol. 5, pages 377-416, July.
    5. Barrett E. Kirwan & Shinsuke Uchida & T. Kirk White, 2012. "Aggregate and Farm-Level Productivity Growth in Tobacco: Before and After the Quota Buyout," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 94(4), pages 838-853.
    6. 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.
    7. 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.
    8. 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.
    9. 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.
    10. Francisco Buera, 2014. "The Global Diffusion of Ideas," 2014 Meeting Papers 1099, Society for Economic Dynamics.
    11. Buera, Francisco J. & Oberfield, Ezra, 2015. "The Global Diffusion of Ideas," Working Paper Series WP-2016-13, Federal Reserve Bank of Chicago.
    12. 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.
    13. 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.
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    1. Policy Distortions and Aggregate Productivity with Endogenous Establishment-Level Productivity
      by Christian Zimmermann in NEP-DGE blog on 2016-04-21 18:22:53

    Citations

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    Cited by:

    1. Pedro Bento & Diego Restuccia, 2017. "Misallocation, Establishment Size, and Productivity," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(3), pages 267-303, July.
    2. repec:kap:enreec:v:68:y:2017:i:2:d:10.1007_s10640-016-0017-3 is not listed on IDEAS
    3. Savagar, Anthony & Dixon, Huw David, 2017. "Firm Entry, Excess Capacity and Aggregate Productivity," Cardiff Economics Working Papers E2017/8, Cardiff University, Cardiff Business School, Economics Section.
    4. Diego Restuccia & Richard Rogerson, 2017. "The Causes and Costs of Misallocation," Journal of Economic Perspectives, American Economic Association, vol. 31(3), pages 151-174, Summer.
    5. Da Rocha Alvarez, Jose Maria & Prellezo, Raul & Sempere, Jaume & Taboada-Antelo, Luis, 2016. "Fleet dynamics and capital malleability," MPRA Paper 75370, University Library of Munich, Germany.
    6. Da Rocha Alvarez, Jose Maria & Prellezo, Raul & Sempere, Jaume & Taboada-Antelo, Luis, 2016. "Fleet dynamics and overcapitalization under rational expectations," MPRA Paper 79578, University Library of Munich, Germany.
    7. Michele Battisti & Filippo Belloc & Massimo Del Gatto, 2017. "Technology-specific Production Functions," Working Paper series 17-26, Rimini Centre for Economic Analysis.
    8. Kaiji Chen & Alfonso Irarrazabal, 2015. "The Role of Allocative Efficiency in a Decade of Recovery," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(3), pages 523-550, July.
    9. Diego Restuccia, 2018. "Misallocation and Aggregate Productivity across Time and Space," Working Papers tecipa-608, University of Toronto, Department of Economics.
    10. Kaiji Chen & Alfonso Irarrazabal, 2015. "The Role of Allocative Efficiency in a Decade of Recovery," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(3), pages 523-550, July.
    11. José-María Da-Rocha & Raul Prellezo & Jaume Sempere & Luis Taboada Antelo, 2017. "A dynamic economic equilibrium model for the economic assessment of the fishery stock-rebuilding policies," Serie documentos de trabajo del Centro de Estudios Económicos 2017-01, El Colegio de México, Centro de Estudios Económicos.
    12. José-María Da-Rocha & Jaume Sempere, 2017. "ITQs, Firm Dynamics and Wealth Distribution: Does Full Tradability Increase Inequality?," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 68(2), pages 249-273, October.
    13. Emircan Yurdagul & Julieta Caunedo, 2015. "Who Quits Next? Firm Growth in Growing Economies," 2015 Meeting Papers 1240, Society for Economic Dynamics.

    More about this item

    Keywords

    distortions; misallocation; investment; endogenous productivity; establishments.;

    JEL classification:

    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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