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Policy Distortions and Aggregate Productivity with Endogenous Establishment-Level Productivity

Author

Listed:
  • Jose-Maria Da-Rocha
  • Diego Restuccia
  • Marina M. Tavares
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 the effect of policy distortions hinges crucially on the size distribution of establishments approximately satisfying Zipf's law, an empirical phenomenon that can be interpreted to imply that misallocation is low or that the establishments' lifespan is long, or both. More distorted economies feature higher establishment lifespan which amplifies the negative effect of distortions on productivity and establishment growth. Policy distortions substantially reduce aggregate TFP, an effect that is 2.8-fold larger than in the model with unrestricted size distribution and 6.9-fold larger with perfectly correlated distortions.

Suggested Citation

  • Jose-Maria Da-Rocha & Diego Restuccia & Marina M. Tavares, 2021. "Policy Distortions and Aggregate Productivity with Endogenous Establishment-Level Productivity," Working Papers tecipa-702, University of Toronto, Department of Economics.
    • Handle: RePEc:tor:tecipa:tecipa-702
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    More about this item

    Keywords

    distortions; misallocation; investment; productivity; Zipf's law.;
    All these keywords.

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
    • O5 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies
    • E0 - Macroeconomics and Monetary Economics - - General
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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