On Productivity and Distortions across Countries

I examine the empirical properties of firm-level productivity and distortions across countries using the newly released World Bank Enterprise Surveys (WBES). Using a standard framework of production heterogeneity, I show that the gap in productivity and distortions between high and low productivity firms is larger in developing countries, generating large aggregate productivity losses from misallocation. A key empirical property of distortions in developing countries is that they systematically weaken the relationship between firm size and firm productivity. I exploit a unique feature of the WBES data to document which specific aspects of the economic environment faced by firms, such as financial constraints, regulation, corruption, and weak infrastructure, are consistent with the empirical pattern of distortions across countries.