Working Paper: NBER ID: w14914
Authors: Francisco J. Buera; Joseph Kaboski; Yongseok Shin
Abstract: Income differences across countries primarily reflect differences in total factor productivity (TFP). More disaggregated data show that the TFP gap between rich and poor countries varies systematically across industrial sectors of the economy: Poor countries are particularly unproductive in tradable and investment goods sectors. In this paper, we develop a quantitatively-oriented framework to explain such cross-country patterns in aggregate and sectoral TFP. We start by documenting that an important distinction between sectors is their average establishment size. For example, establishments in tradable and investment goods sectors operate at much larger scales than those in the non-tradable sector. In our model, sectors with larger scales of operation have more financing needs, and are hence disproportionately affected by financial frictions. Our quantitative exercises show that financial frictions account for a substantial part of the observed cross-country patterns in TFP, both at the aggregate and at the sectoral level. Our model also has novel implications for the impact of financial frictions on the relative scale between the tradable and the non-tradable sectors, which are shown to be consistent with the data.
Keywords: Total Factor Productivity; Financial Frictions; Economic Development; Entrepreneurship
JEL Codes: E44; O11; O16; O41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial frictions (G19) | lower TFP in sectors with larger scales of operation (D24) |
| Financial frictions (G19) | misallocation of capital (E22) |
| misallocation of capital (E22) | lower sectoral and aggregate TFP (O49) |
| Financial frictions (G19) | misallocation of talent into entrepreneurship (D29) |
| misallocation of talent into entrepreneurship (D29) | lower TFP (D24) |
| Financial frictions (G19) | factor-of-two difference in income between countries (F40) |