Working Paper: NBER ID: w23339
Authors: Josmara Darocha; Marina Mendes Tavares; Diego Restuccia
Abstract: What accounts for income per capita and total factor productivity (TFP) differences across countries? We study resource misallocation across heterogeneous production units in a general equilibrium model where establishment productivity and size are affected by policy distortions. We solve the model in closed form and show that policy distortions have a substantial negative effect on establishment productivity growth, average establishment size, and aggregate productivity. Calibrating a distorted benchmark economy to U.S. data, we find that empirically reasonable variations in distortions generate reductions in aggregate TFP of more than 24 percent while slightly increasing concentration in the establishment size distribution. If distortions in addition lower the exit rate of incumbent establishments, as supported by some empirical evidence, the aggregate TFP loss doubles to 48 percent.
Keywords: policy distortions; aggregate productivity; establishment-level productivity
JEL Codes: E0; E1; O1; O4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| policy distortions (H31) | establishment productivity growth (O49) |
| policy distortions (H31) | aggregate TFP (E23) |
| policy distortions (H31) | exit rate of incumbent establishments (J63) |
| exit rate of incumbent establishments (J63) | aggregate TFP (E23) |
| policy distortions (H31) | productivity (O49) |