Working Paper: NBER ID: w20404
Authors: Hugo A. Hopenhayn
Abstract: Abstract The paper considers formally the mapping from distortions in the allocations of resources across firms to aggregate productivity. TFP gaps are characterized as the integral of a strictly concave function with respect to an employment-weighted measure of distortions. Size related distortions are shown to correspond to a mean preserving spread of this measure, explaining the stronger effects on TFP found in the literature. In general, the effect of correlation between distortions and productivity is shown to be ambiguous; conditions are given to determine its sign. An empirical lower bound on distortions based on size distribution of firms is derived and analyzed, revealing that substantial rank reversals in firm size are necessary for distortions to explain large TFP gaps. The effect of curvature on the impact and measurement of distortions is also considered.
Keywords: Distortions; Aggregate Productivity; TFP
JEL Codes: O11; O40; O47
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| distortions (H31) | aggregate productivity (E23) |
| large distortions (F12) | productivity (O49) |
| reallocating labor from high TFP firms to low TFP firms (F16) | aggregate productivity (E23) |
| mean-preserving spread of distortions (C46) | lower productivity (O49) |
| correlation between wedges and productivity (O49) | ambiguous effects on TFP (F16) |
| distortions (H31) | total factor productivity (TFP) (D24) |
| size-related distortions (F12) | mean-preserving spread of distortions (C46) |