Working Paper: NBER ID: w22809
Authors: Pedro Bento; Diego Restuccia
Abstract: We consider a tractable model of heterogeneous production units that features endogenous entry and productivity investment to assess the quantitative impact of policy distortions on aggregate output and establishment size. Relative to the standard factor misallocation framework, policy distortions featuring a positive productivity elasticity of distortions imply larger reductions in output through smaller investments in establishment productivity. A calibrated version of the model implies that when the productivity elasticity of distortions increases from 0.09 in the U.S. to 0.5 in India, aggregate output and average establishment size fall by 53 and 86 percent, compared to 37 and 0 percent in the standard factor misallocation model. Entry productivity investment and factor misallocation contribute equally to the reduction in output, whereas the effect of lower life-cycle productivity growth is fully offset by increased entry and reduced productivity dispersion. Establishment size differences in the model are consistent with evidence from a comprehensive dataset we construct on average establishment size in manufacturing using census data for 134 countries.
Keywords: No keywords provided
JEL Codes: O1; O4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| productivity elasticity of distortions (H31) | aggregate output (E10) |
| productivity elasticity of distortions (H31) | establishment size (L25) |
| lower lifecycle productivity growth (O49) | increased entry (F29) |
| lower lifecycle productivity growth (O49) | reduced productivity dispersion (O49) |
| correlated distortions (C10) | aggregate productivity (E23) |
| policy distortions (H31) | smaller investments in establishment productivity (D29) |