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On Average Establishment Size across Sectors and Countries

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  • Pedro Bento
  • Diego Restuccia

Abstract

We construct a new dataset for the average employment size of establishments across sectors and countries from hundreds of sources. Establishments are larger in manufacturing than in services, and in each sector they are larger in richer countries. The cross-country income elasticity of establishment size is remarkably similar across sectors, about 0.3. We discuss these facts in light of several prominent theories of development such as entry costs and misallocation. We then quantify the sectoral and aggregate impact of entry costs and misallocation in an otherwise standard two-sector model with endogenous firm entry, firm-level productivity, and sectoral employment shares. We find that observed measures of misallocation account for the entire range of establishment-size differences across sectors and countries and almost 50 percent of the difference in non-agricultural GDP per capita between rich and poor countries.

Suggested Citation

  • Pedro Bento & Diego Restuccia, 2019. "On Average Establishment Size across Sectors and Countries," Working Papers tecipa-642, University of Toronto, Department of Economics.
  • Handle: RePEc:tor:tecipa:tecipa-642
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    1. D'Erasmo, Pablo N. & Moscoso Boedo, Hernan J., 2012. "Financial structure, informality and development," Journal of Monetary Economics, Elsevier, vol. 59(3), pages 286-302.
    2. 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.
    3. James J. Heckman & Carmen Pagés, 2004. "Law and Employment: Lessons from Latin America and the Caribbean," NBER Books, National Bureau of Economic Research, Inc, number heck04-1, March.
    4. 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.
    5. Margarida Duarte & Diego Restuccia, 2010. "The Role of the Structural Transformation in Aggregate Productivity," The Quarterly Journal of Economics, Oxford University Press, vol. 125(1), pages 129-173.
    6. 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.
    7. Pedro Bento, 2014. "Competition as a Discovery Procedure: Schumpeter Meets Hayek in a Model of Innovation," American Economic Journal: Macroeconomics, American Economic Association, vol. 6(3), pages 124-152, July.
    8. James J. Heckman & Carmen Pagés, 2004. "Introduction to "Law and Employment: Lessons from Latin American and the Caribbean"," NBER Chapters, in: Law and Employment: Lessons from Latin America and the Caribbean, pages 1-108, National Bureau of Economic Research, Inc.
    9. 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.
    10. Steven J. Davis & John Haltiwanger & Ronald S. Jarmin & C.J. Krizan & Javier Miranda & Alfred Nucci & Kristin Sandusky, 2009. "Measuring the Dynamics of Young and Small Businesses: Integrating the Employer and Nonemployer Universes," NBER Chapters, in: Producer Dynamics: New Evidence from Micro Data, pages 329-366, National Bureau of Economic Research, Inc.
    11. Hernan Moscoso Boedo & Toshihiko Mukoyama, 2012. "Evaluating the effects of entry regulations and firing costs on international income differences," Journal of Economic Growth, Springer, vol. 17(2), pages 143-170, June.
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    Cited by:

    1. Peter Bauer & Igor Fedotenkov & Aurelien Genty & Issam Hallak & Peter Harasztosi & David Martinez Turegano & David Nguyen & Nadir Preziosi & Ana Rincon-Aznar & Miguel Sanchez Martinez, 2020. "Productivity in Europe: Trends and drivers in a service-based economy," JRC Working Papers JRC119785, Joint Research Centre (Seville site).
    2. Pedro Bento & Diego Restuccia, 2019. "The Role of Nonemployers in Business Dynamism and Aggregate Productivity," Working Papers tecipa-640, University of Toronto, Department of Economics.
    3. Perez Sebastian,Fidel & Steinbuks,Jevgenijs & Feres,Jose Gustavo & Trotter,Ian Michael, 2020. "Electricity Access and Structural Transformation : Evidence from Brazil's Electrification," Policy Research Working Paper Series 9182, The World Bank.
    4. Pedro Bento, 2020. "Competition, Innovation, and the Number of Firms," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 37, pages 275-298, July.
    5. Marcela Eslava & John C. Haltiwanger, 2020. "The Size and Life-cycle Growth of Plants: The Role of Productivity, Demand and Wedges," NBER Working Papers 27184, National Bureau of Economic Research, Inc.
    6. Christian Saborowski & Florian Misch, 2019. "Firm Size, Life Cycle Dynamics and Growth Constraints: Evidence from Mexico," IMF Working Papers 19/87, International Monetary Fund.

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    More about this item

    Keywords

    establishment size; manufacturing; services; distortions; misallocation; productivity.;
    All these keywords.

    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
    • O5 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies
    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models

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