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Policy Distortions and Aggregate Productivity with Endogenous Establishment-Level Productivity

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  • Jose-Maria Da-Rocha
  • Diego Restuccia
  • Marina M. Tavares

Abstract

What accounts for differences in output per capita and total factor productivity (TFP) across countries? Empirical evidence points to resource misallocation across heterogeneous production units as an important factor. We study misallocation in a general equilibrium model of establishment productivity where the distribution of productivity is characterized in closed form and responds to the same policy distortions that create misallocation. In this framework, policy distortions not only misallocate resources across a given set of productive units (static effect), but also create disincentives for productivity improvement thereby altering the productivity distribution and equilibrium prices (dynamic effect), further lowering aggregate output and TFP. The dynamic effect is substantial contributing to a doubling of the static misallocation effect. Reducing the dispersion in distortions by 25 percentage points to the level of the U.S. benchmark economy implies an increase in relative aggregate output of 123 percent, where 54 percent arises from factor misallocation (static effect).

Suggested Citation

  • Jose-Maria Da-Rocha & Diego Restuccia & Marina M. Tavares, 2019. "Policy Distortions and Aggregate Productivity with Endogenous Establishment-Level Productivity," Working Papers tecipa-629, University of Toronto, Department of Economics.
  • Handle: RePEc:tor:tecipa:tecipa-629
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    References listed on IDEAS

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    Cited by:

    1. Da-Rocha, José-María & Restuccia, Diego & Tavares, Marina Mendes, 2019. "Firing costs, misallocation, and aggregate productivity," Journal of Economic Dynamics and Control, Elsevier, vol. 98(C), pages 60-81.
    2. repec:kap:enreec:v:68:y:2017:i:2:d:10.1007_s10640-016-0017-3 is not listed on IDEAS
    3. Huw Dixon & ANTHONY SAVAGAR, 2017. "The Effect of Firm Entry on Capacity Utilization and Macroeconomic Productivity," 2017 Meeting Papers 1130, Society for Economic Dynamics.
    4. Anthony Savagar, 2018. "Measured Productivity with Endogenous Markups and Economic Profits," Studies in Economics 1812, School of Economics, University of Kent.
    5. 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.
    6. 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.
    7. 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.
    8. Michele Battisti & Filippo Belloc & Massimo Del Gatto, 2017. "Technology-specific Production Functions," Working Paper series 17-26, Rimini Centre for Economic Analysis.
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    10. repec:bla:ecinqu:v:57:y:2019:i:1:p:33-49 is not listed on IDEAS
    11. Diego Restuccia, 2019. "Misallocation and aggregate productivity across time and space," Canadian Journal of Economics, Canadian Economics Association, vol. 52(1), pages 5-32, February.
    12. 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.
    13. Pedro Bento & Diego Restuccia, 2017. "Misallocation, Establishment Size, and Productivity," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(3), pages 267-303, July.
    14. 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.
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    16. 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.
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    More about this item

    Keywords

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

    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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