Working Paper: NBER ID: w10584
Authors: Raphael Bergoeing; Norman Loayza; Andrea Repetto
Abstract: Economies respond differently to aggregate shocks that reduce output. While some countries rapidly recover their pre-crisis trend, others stagnate. Recent studies provide empirical support for a link between aggregate growth and plant dynamics through its effect on productivity: the entry and exit of firms and the reallocation of resources from less to more efficient firms explain a relevant part of transitional productivity dynamics. In this paper we use a stochastic general equilibrium model with heterogeneous firms to study the effect on aggregate short-run growth of policies that distort the process of birth, growth and death of firms, as well as the reallocation of resources across economic units. Our findings show that indeed policies that alter plant dynamics can explain slow recoveries. We also find that output losses associated to delayed recoveries are large.
Keywords: economic recovery; firm dynamics; regulatory environment; aggregate shocks; policy interventions
JEL Codes: D21; D24; L16; L60; O40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government interventions (H53) | impediments to resource reallocation (F16) |
| impediments to resource reallocation (F16) | slow and costly recoveries from economic shocks (E65) |
| policies altering plant dynamics (Q28) | slow recoveries (E65) |
| delayed recoveries (G33) | substantial output losses (E23) |
| distorted economies (P19) | longer recovery periods (C41) |
| excessive labor protection (J89) | impediments to resource reallocation (F16) |
| entry barriers (L13) | impediments to resource reallocation (F16) |
| burdensome bankruptcy laws (K35) | impediments to resource reallocation (F16) |
| subsidies to incumbent firms (H23) | prevent inefficient plants from exiting (Q52) |
| prevent inefficient plants from exiting (L19) | hinder entry of technologically advanced firms (F23) |
| hinder entry of technologically advanced firms (F23) | push economy inside its production possibilities frontier (E23) |