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Firing Costs, Misallocation, and Aggregate Productivity

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

We assess the quantitative impact of firing costs on aggregate total factor productivity (TFP) in a dynamic general-equilibrium framework where the distribution of establishment-level productivity is not invariant to the policy. We show that firing costs not only generate static misallocation, but also a worsening of the productivity distribution substantially contributing to large aggregate TFP losses. In a calibrated version of the model, firing costs equivalent to 5 years' wages imply a drop in TFP of more than 20 percent. Consistent with the existing literature on firing costs, static misallocation only generates a small drop in TFP, accounting for around 20 percent of the total loss, whereas the remaining 80 percent arises from the endogenous change in the productivity distribution.

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File URL: https://www.economics.utoronto.ca/public/workingPapers/tecipa-561.pdf
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Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-561.

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Length: Unknown pages
Date of creation: 19 May 2016
Handle: RePEc:tor:tecipa:tecipa-561
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  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. Luis Garicano & Claire Lelarge & John Van Reenen, 2016. "Firm Size Distortions and the Productivity Distribution: Evidence from France," American Economic Review, American Economic Association, vol. 106(11), pages 3439-3479, November.
  3. Nezih Guner & Andrii Parkhomenko & Gustavo Ventura, 2015. "Managers and Productivity Differences," Working Papers 861, Barcelona Graduate School of Economics.
  4. François Gourio & Nicolas Roys, 2014. "Size‐dependent regulations, firm size distribution, and reallocation," Quantitative Economics, Econometric Society, vol. 5, pages 377-416, July.
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