Misallocation and Aggregate Productivity

Transcription

1 Misallocation and Aggregate Productivity Diego Restuccia University of Toronto and NBER University of Oslo August 14-18, 2017 Restuccia Macro Growth and Development University of Oslo 1 / 77

2 Overview Misallocation and Productivity Basic framework Empirical evidence Applications: specific policies and institutions Applications: broader consequences of misallocation Restuccia Macro Growth and Development University of Oslo 2 / 77

3 Misallocation and Productivity Survey articles: Restuccia and Rogerson (RED 2013) Restuccia (Palgrave 2013) Hopenhayn (2014) http: //dx.doi.org/ /annurev-economics Restuccia and Rogerson (2017) Restuccia Macro Growth and Development University of Oslo 3 / 77

4 Resource Allocation with Heterogeneous Production Based on Restuccia and Rogerson (2008) Policy Distortions and Aggregate Productivity with Heterogeneous Establishments Extensive literature on income differences across countries with focus on a stand-in firm and aggregate barriers or distortions Micro evidence: allocation of resources across productive uses may be important Baily, Hulten, and Campbell (1992) Restuccia Macro Growth and Development University of Oslo 4 / 77

5 Goals Assess the quantitative role of resource allocation across productive uses in development Consider a version of neoclassical growth model with heterogeneous producers Consider distortions to the prices faced by different producers (idiosyncratic distortions) Restuccia Macro Growth and Development University of Oslo 5 / 77

6 Idiosyncratic Distortions Credit market imperfections and non-competitive banking systems Public enterprises Trade restrictions Labor market regulations Corruption and selective government industrial policy Restuccia Macro Growth and Development University of Oslo 6 / 77

7 Model Production unit is the establishment: f(s, k, n) = sk α n γ, 0 < γ + α < 1 Idiosyncratic productivity s constant over time Exogenous probability of exit λ Fixed cost of operation c f every period Entry cost c e and productivity of entrants from cdf H(s) Restuccia Macro Growth and Development University of Oslo 7 / 77

8 Primer on Resource Allocation M producers of a single good with production function y i = z 1 γ i n γ i, γ < 1. Efficient allocation maximizes output subject to aggregate resources max Y e = y i = z 1 γ i n γ i s.t. n i = N. {n i 0} i i Efficient allocation: n e i = z i i z i N. Key features of efficient allocation: More productive establishments allocated more resources, strong association between establishment productivity and size. Equally productive establishments allocated the same amount of resources, hence of same size. Restuccia Macro Growth and Development University of Oslo 8 / 77

9 Primer on Resource Allocation Aggregate production function in the efficient allocation, where Y e = AN γ M 1 γ, ( i A = z ) 1 γ i = z 1 γ. M Any allocation that deviates from the efficient allocation will reduce output (even allocating more resources to the more productive producers), will show up as lower A. Aggregate production function is CRS despite DRS at the establishment level. Restuccia Macro Growth and Development University of Oslo 9 / 77

10 Consumers Infinitely-lived representative household: β t u(c t ), 0 < β < 1 t=0 Endowments: One unit of productive time each period, K 0 > 0 units of the capital stock, and equal shares of all establishments Budget constraint: p t (C t + K t+1 (1 δ)k t ) = t=0 p t (r t K t + w t N t + π t T t ) t=0 Restuccia Macro Growth and Development University of Oslo 10 / 77

11 Policy Distortions Focus on policies that create idiosyncratic distortions to establishment-level decisions Each establishment faces its own output tax/subsidy denoted by τ ( 1, 1) Entering establishments face draws of s and τ (assume finite number of possible s and τ) Given cdf H(s), policy distortions induce a joint distribution cdf G(s, τ) (pdf g) Restuccia Macro Growth and Development University of Oslo 11 / 77

12 Incumbent Establishment s Problem Per-period profit function: π(s, τ) = max n,k {(1 τ)skα n γ wn rk c f } k(s, τ), n(s, τ) optimal decisions With constant (s, τ), present value of incumbent plant: W (s, τ) = π(s, τ) 1 ρ, ρ = 1 λ 1 + R Restuccia Macro Growth and Development University of Oslo 12 / 77

13 Entering Establishment s Problem The expected value of a potential entrant: W e = (s,τ) max [W (s, τ), 0] g(s, τ) c e x(s, τ) optimal entry decision Restuccia Macro Growth and Development University of Oslo 13 / 77

14 Invariant Distribution of Establishments Denote µ(s, τ) the distribution of producing establishments this period and E the mass of entrants Next period s distribution: µ (s, τ) = (1 λ)µ(s, τ) + x(s, τ)g(s, τ)e Let ˆµ be the invariant distribution associated with E = 1: ˆµ(s, τ) = x(s, τ) g(s, τ) λ Restuccia Macro Growth and Development University of Oslo 14 / 77

15 Labor Market Clearing Aggregate labor demand: N(r, w) = E (s,τ) n(s, τ)ˆµ(s, τ) Labor supply inelastic equal to one, entry E satisfies: E = (s,τ) 1 n(s, τ)ˆµ(s, τ) Restuccia Macro Growth and Development University of Oslo 15 / 77

16 Definition of Equilibrium A steady state competitive equilibrium with entry is w, r, T, µ(s, τ), E, W (s, τ), π(s, τ), W e, x(s, τ), k(s, τ), n(s, τ), C, and K such that: Consumer optimization r = 1/β (1 δ) Plant optimization Free-entry W e = 0 Market clearing: labor, capital, output Government budget balance T + s,τ τf(s, k, n)µ(s, τ) = 0 Invariant µ µ(s, τ) = E x(s, τ) g(s, τ) λ Restuccia Macro Growth and Development University of Oslo 16 / 77

17 Calibration Calibrate undistorted benchmark economy to U.S. data Model period equal to a year Parameter Value Target α Capital income share γ Labor income share β 0.96 Real rate of return δ 0.08 Investment to output ratio c e 1.0 Normalization c f 0.0 Benchmark case λ 0.1 Annual exit rate Restuccia Macro Growth and Development University of Oslo 17 / 77

18 Calibration Key elements: range of s and H(s) Use mapping from s to n and from H(s) to µ(s) implied by the model ( ) 1 n i si 1 γ α = n j µ(s) = x(s) λ h(s) Number of workers per establishment in U.S. data implies s [1, 3.98] s j Restuccia Macro Growth and Development University of Oslo 18 / 77

19 Establishments by Employment Size Cummulative Distribution of Establishments Model Data ,000 10,000 Number of Employees (log scale) Restuccia Macro Growth and Development University of Oslo 19 / 77

20 Distribution Statistics B.E. Establishment Size Number of Employees < 5 5 to Share of establishments Share of output Share of labor Share of capital Average employment Restuccia Macro Growth and Development University of Oslo 20 / 77

21 Idiosyncratic Distortions Tax/Subsidy Policies Assume a fraction of plants are taxed and the rest are subsidized Output tax/subsidy combinations: Tax packages of 0.1, 0.2, 0.3, 0.4, with subsidies so that the net effect on steady state capital accumulation is zero Lump-sum redistribution to consumers to balance the government budget Restuccia Macro Growth and Development University of Oslo 21 / 77

22 Uncorrelated Idiosyncratic Distortions τ t Variable Relative Y Relative TFP Relative E Y s /Y S/Y τ s Restuccia Macro Growth and Development University of Oslo 22 / 77

23 Correlated Idiosyncratic Distortions τ t Variable Relative Y Relative TFP Relative E Y s /Y S/Y τ s Restuccia Macro Growth and Development University of Oslo 23 / 77

24 Correlated Idiosyncratic Distortions Fraction of Establishments τ t Taxed (%): Restuccia Macro Growth and Development University of Oslo 24 / 77

25 Restuccia and Rogerson (2008) Study misallocation by extending the neoclassical growth model with production heterogeneity Focus on misallocation (no selection, fixed cost set to zero) Consider idiosyncratic policy distortions in the form of effective output taxes/subsidies τ i (1 τ i ) = 1 A θ i ɛ i where θ controls the elasticity of distortions with respect to productivity (correlated distortions) and ɛ i reflects random idiosyncratic distortions (uncorrelated distortions) Assume ɛ i log normally distributed with mean zero and standard deviation σ ɛ Restuccia Macro Growth and Development University of Oslo 25 / 77

26 Restuccia and Rogerson (2008) Calibrate benchmark economy with no distortions (θ = 0, σ ɛ = 0) to US data: key are moments of productivity distribution A i (employment-size distribution or estimates of TFP) Study the impact of correlated and/or uncorrelated distortions on aggregate output and TFP For each economy (θ, σ ɛ ), report the ratio of TFP in the efficient allocation (benchmark economy) to the distorted economy θ σ ɛ Restuccia Macro Growth and Development University of Oslo 26 / 77

27 Distorted Allocation (θ = 0.9,σ ɛ = 0.4) 0-5 Establishment Employment h i (in logs) Distorted Efficient Establishment TFP A i (in logs) Restuccia Macro Growth and Development University of Oslo 27 / 77

28 Land Misallocation in Malawi Restuccia and Santaeulalia-Llopis (2017): Efficient factor reallocation increases aggregate agricultural productivity by 3.4-fold Restuccia Macro Growth and Development University of Oslo 28 / 77

29 Summarizing Idiosyncratic distortions can lead to substantial reallocation of resources across heterogeneous production units The impact of this reallocation on aggregate TFP and output per capita can be large Given the pervasiveness of institutions, policies, and regulations that induce resource reallocation across productive units, this channel may prove useful in accounting for some of the patterns in output, capital accumulation, and TFP across countries Restuccia Macro Growth and Development University of Oslo 29 / 77

30 Evidence of Misallocation An important insight of basic framework (e.g. y i = A i h γ i ) is that to maximize output, the marginal (or average) product of factors should equalize across producers of the same good (1 τ i )γ y i = w h }{{} i Value of marginal output In this context we can define Revenue Productivity as TFPR i y i h i 1 (1 τ i ) TFPR i equalizes across producers in the efficient allocation (more productive establishments are larger) whereas in the distorted economy TFPR i is higher for producers with higher distortions Restuccia Macro Growth and Development University of Oslo 30 / 77

31 Evidence of Misallocation TFPR i y i h i 1 (1 τ i ) Suggests two broad approaches to assess the empirical relevance of misallocation: indirect and direct Indirect: measure deviations in TFPR i across producers using data on output and inputs Direct: Measure specific policies and institutions that generate (1 τ i ) differences Remark: The aggregate productivity cost of misallocation depends not only on dispersion in TFPR i but also on dispersion of A i (generally joint distribution) Restuccia Macro Growth and Development University of Oslo 31 / 77

32 Indirect Approach Assess extent of misallocation without identifying underlying cause: Hsieh and Klenow (2009) Evidence points to substantial misallocation and large TFP loses from misallocation SD (log TFPR i ) TFP gains China (1998) % India (1991) % India (1994) % United States (1997) % Restuccia Macro Growth and Development University of Oslo 32 / 77

33 Indirect Approach Evidence of misallocation from many other contexts/countries Recent World Bank study using census data for manufacturing in poor African countries (Cirera, Fattal-Jaef, and Maemir 2017) SD (log TFPR i ) θ TFP gains Cote d Ivoire % Kenya % Ghana % Ethiopia % Restuccia Macro Growth and Development University of Oslo 33 / 77

34 Empirical evidence of misallocation Drawn from: Hsieh and Klenow (2009) Simplified static framework Restuccia Macro Growth and Development University of Oslo 34 / 77

35 Production Technology One homogeneous good produced each period Production unit is an establishment with idiosyncratic productivity s i, labor input (l i ), and capital (k i ) Fixed number M of establishments Production according to a decreasing returns to scale technology, y i = s 1 γ i [ l α i ki 1 α ] γ where y i = establishment output and γ = span-of-control parameter Restuccia Macro Growth and Development University of Oslo 35 / 77

36 Efficient Allocation Problem Planner maximizes total output Y e subject to resource constraints, given K, L, and M establishments with idiosyncratic productivity: subject to Y e = max {l i,k i } M i=1 M i=1 s 1 γ i i=1 ( l α i ki 1 α ) γ, i = 1, 2,...M; M M L = l i ; K = i=1 Y e is aggregate output under the efficient allocation k i Restuccia Macro Growth and Development University of Oslo 36 / 77

37 Efficient Allocation l i = s i M j=1 s j L k i = s i M j=1 s j K Relatively more productive establishments should command relatively more labor and capital in the efficient allocation. Establishments with same productivity should be of same size. ( M ) 1 γ Y e = s i (L α K 1 α ) γ = ( sm) 1 γ (L α K 1 α ) γ i=1 Restuccia Macro Growth and Development University of Oslo 37 / 77

38 Idiosyncratic Distortions Rationalize actual allocations as an equilibrium outcome of a competitive economy with distortions: τ l i = establishment-specific labor tax (wedge) τ k i = establishment-specific capital tax (wedge) Total tax revenues distributed lump sum across all households Restuccia Macro Growth and Development University of Oslo 38 / 77

39 Establishment Problem Establishment i maximizes profits, { ( max π i = y i 1 + τi k l i,k i r = capital rental rate w = labor wage ) rk i ( ) } 1 + τi l wl i Restuccia Macro Growth and Development University of Oslo 39 / 77

40 Market Clearing Conditions Labor market clearing condition: M l i = L i=1 Capital market clearing condition: M k i = K i=1 Restuccia Macro Growth and Development University of Oslo 40 / 77

41 Identification of Wedges Use equilibrium framework to identify establishment-specific wedges { τ k i, τ l i } M i=1 From determination of labor and capital allocations, i.e. wedges that rationalize actual allocations as an equilibrium outcome Restuccia Macro Growth and Development University of Oslo 41 / 77

42 Identification of Wedges Establishment-level labor and capital wedges can be identified up to a scalar from the average product of each factor Farm-level FOCs imply, MRP L i αγ MRP K i (1 α)γ = y i ( 1 + τ l i ) = y i = w ( ) 1 + τi l l i αγ = r ( ) 1 + τ k ( ) i k i (1 α)γ 1 + τi k MRP X = marginal (revenue) product of factor X Restuccia Macro Growth and Development University of Oslo 42 / 77

43 Summary Measure of Distortions Summary measure of distortions for establishment i, T F P R i = = ( 1 + τ l i y i l α i k1 α i ) α ( 1 + τ k i ( MRP Li = αγ ) ( ) 1 α w α ( αγ ) α ( ) MRP 1 α Ki = (1 α)γ r (1 α)γ ) 1 α T F P R = revenue productivity Restuccia Macro Growth and Development University of Oslo 43 / 77

44 Aggregation of Factor Distortions Average marginal revenue product of labor αγy L = w M y i i=1 Y 1 1+τ l i MRP L Average marginal revenue product of capital (1 α)γy K = M i=1 r y i Y 1 1+τ k i MRP K Y = M i=1 y i = aggregate real output K = M i=1 k i = aggregate capital input Restuccia Macro Growth and Development University of Oslo 44 / 77

45 Aggregate TFP Distorted Economy where T F P = [ M i=1 ( ) ] s i T F P R γ 1 γ 1 γ M T F P R i ( ) α ( ) 1 α MRP L MRP K T F P R = αγ (1 α)γ Y = T F P M 1 γ ( L α K 1 α) γ Aggregate output Y in distorted and actual data coincide Restuccia Macro Growth and Development University of Oslo 45 / 77

46 Data Manufacturing plants in the U.S., China, and India Mapping of model to data non trivial but can be done Data on real output y i, capital k i, and labor l i Need to calibrate elasticity parameters α and γ Use establishment-level production function to measure s i, i.e. T F P Q i Restuccia Macro Growth and Development University of Oslo 46 / 77

47 Quantitative Assessment of Misallocation Output (TFP) gain from eliminating misallocation given by, Y e Y = T F P e T F P Relates to dispersion in T F P R i Restuccia Macro Growth and Development University of Oslo 47 / 77

48 Restuccia Macro Growth and Development University of Oslo 48 / 77

49 Restuccia Macro Growth and Development University of Oslo 49 / 77

50 Restuccia Macro Growth and Development University of Oslo 50 / 77

51 Restuccia Macro Growth and Development University of Oslo 51 / 77

52 Restuccia Macro Growth and Development University of Oslo 52 / 77

53 Restuccia Macro Growth and Development University of Oslo 53 / 77

54 Indirect Approach Approach useful in identifying relevant patterns (within industry, across industry, across time and space, across occupations, etc.) But is silent about the specific sources of misallocation Identifying causes of misallocation key for policy analysis There are also important limitations related to measurement and specification Demand structure to separate price and output from revenue data (not an issue with plant-specific price deflators or when quantity data is available) Specification of production structure Inputs-outputs may be measured with error (Bils, Klenow, and Ruane 2017) Adjustment costs vs. distortions (David and Venkateswaran 2017) Restuccia Macro Growth and Development University of Oslo 54 / 77

55 Direct Approach Quantifies role of specific policies/institutions creating misallocation either through quasi-natural experiments or via a structural model Some examples: Regulation and discretionary provisions Selective industrial policy Financial frictions Trade restrictions Restuccia Macro Growth and Development University of Oslo 55 / 77

56 Regulations Firing costs (Hopenhayn and Rogerson 1993) Adjustment costs created by policy generating misallocation Firing cost equivalent to 1 year s wages (prevalent in some OECD and developing countries) implies a TFP loss of 2% Firing cost equivalent to 5 year s wages implies dispersion in TFPR of 0.19, correlation log TFPR and TFPQ of 0.76, and TFP loss of 8% (Hopenhayn 2014) Size-dependent policies (Guner, Ventura, and Xu 2008) Distortions related to the size of the establishment (e.g. number of employees) Large effects on number of establishments and average size Relatively small effects on TFP Restuccia Macro Growth and Development University of Oslo 56 / 77

57 Financial Frictions Large literature, survey in Buera, Kaboski, and Shin (2015) Credit constraints generate dispersion in the marginal product of capital across producers Country-level institution, idiosyncratic effects: credit constraints disproportionally affect productive producers that should operate al larger scale TFP loss from this type of misallocation can be large Restuccia Macro Growth and Development University of Oslo 57 / 77

58 Causes of Misallocation Challenges of direct approach: Many specific policies/institutions not easily amenable to direct measurement Not a single source generating the bulk of misallocation and productivity differences across countries Role of misallocation from specific policies quantitatively limited Many different policies/institutions needed to account for the data Some notable exceptions: Land market institutions in agriculture (Adamopoulos and Restuccia 2014) Changes in policy over time in specific contexts Restuccia Macro Growth and Development University of Oslo 58 / 77

59 Land Market Institutions Land institutions in poor countries characterized by: Lack of well-defined property rights over land Land use-rights are distributed in a fairly egalitarian basis......coupled with difficulty of adjusting operational scales As a result, land not allocated to best uses, leading to small operational scales, preventing the adoption of best practices and investment in farm operations Evidence points to substantial land (and factor) misallocation in agriculture in poor and developing countries Restuccia Macro Growth and Development University of Oslo 59 / 77

60 Land Misallocation in China Land Input (log) Farm TFP (log) Adamopoulos, Brandt, Leight, and Restuccia (2017): Factor misallocation in agriculture has not decreased in China ( ) Restuccia Macro Growth and Development University of Oslo 60 / 77

61 Implicit Agricultural Distortions in China TFPR (log) Farm TFP (log) Large implied correlated distortions in the agricultural sector σ(log(tfpr))=0.97, ρ(log(tfpr),log(tfp))=0.88 Restuccia Macro Growth and Development University of Oslo 61 / 77

62 Aggregate Implications Productivity impact of distortions: Eliminate distortions in agricultural sector in China Result: TFP gain 1.8-fold (Adamopoulos et al 2017) Take US manufacturing distribution of A i s from Hsieh-Klenow Apply China distortions in agriculture from Adamopoulos et al (2017) Result: TFP gain 4-fold Instead apply China distortions in manufacturing Result: TFP gain 1.6-fold Remarks Much larger distortions (misallocation) in agriculture Differences in productivity distribution important Heavier distortions to more productive units prevalent in poor countries, key for broader implications of misallocation Restuccia Macro Growth and Development University of Oslo 62 / 77

63 Changes in Policy in Specific Contexts (1) Land reform in Philippines (Adamopoulos and Restuccia 2015) Cap in farm size + gov. intervention in the land market (direct excess land to landless/smallholders, restrict reallocation) Reform reduces farm size (34%) and aggregate productivity (17%), gov intervention key as market reallocation of excess land generates only 1/3 of the negative effects (2) Trade reform in Chile (Pavnick 2002) Liberalized trade reform on productivity using plant-level data, exploiting differential exposure to external competitive pressure Plants in import competing sectors grew 3-10% more than plants in the non-traded sector Reallocation of resources from less to more efficient plants and through plant exit contributed substantially to aggregate productivity growth during the period Restuccia Macro Growth and Development University of Oslo 63 / 77

64 Simple Framework of TFP Differences What accounts for productivity differences across sectors and countries? Restuccia and Rogerson (2017): Single good produced by N potential heterogeneous production units indexed by i according to y i = A i f(k i, h i ) where A i reflects differences in productivity across producers Fixed cost of operation c in units of output Efficient allocation: Given aggregate capital K and labor H, there is unique threshold Ā such that producers with A i > Ā operate; and producers with higher A i are allocated greater amounts of capital and labor Restuccia Macro Growth and Development University of Oslo 64 / 77

65 Stylized Efficient Allocation log h i log A i Restuccia Macro Growth and Development University of Oslo 65 / 77

66 Stylized Misallocation 0.7 Efficient Data log h i log A i Restuccia Macro Growth and Development University of Oslo 66 / 77

67 Simple Framework of TFP Differences Holding the amount of aggregate resources constant, three channels can account for aggregate TFP differences across countries: Distribution of A i s differs across countries (technology) Countries choose different set of producers to operate (selection) Countries allocate inputs differently across producers (misallocation) All channels seem relevant Remark: specific policies/institutions generating misallocation can have larger effects on TFP by affecting technology/selection channels Restuccia Macro Growth and Development University of Oslo 67 / 77

68 Broader Consequences of Misallocation Early misallocation analysis: given a fixed productivity distribution common across countries, assess quantitative impact of factor misallocation (e.g. Restuccia and Rogerson, 2008) Recent work considers dynamic implications of misallocation Policies/institutions causing misallocation can generate larger effects on aggregate productivity by altering the productivity distribution via technology and selection channels Restuccia Macro Growth and Development University of Oslo 68 / 77

69 Broader Consequences of Misallocation Distribution of A i s differs across countries (technology, selection, sample selection?) Consider accounting from simple parametric framework discussed earlier and moments from micro/aggregate data in Hsieh and Klenow (2009) TFP gain of eliminating distortions China/India relative to US distortions is 60% (half of actual TFP differences) Only half (30%) when China/India relative distortions applied to US productivity distribution A rough TFP decomposition in manufacturing: misallocation (1/4) + selection (1/4) + technology (1/2) Substantial shifts in the productivity distribution via technology/selection required Restuccia Macro Growth and Development University of Oslo 69 / 77

70 Broader Consequences of Misallocation Some illustrative examples (misallocation + selection): Financial frictions (Buera, Kaboski, and Shin 2011; Midrigan and Xu 2014) Distorts entrepreneur-worker choices in addition to misallocation Generates large negative effects on productivity Can account for 40% of non-agricultural productivity differences across countries Restuccia Macro Growth and Development University of Oslo 70 / 77

71 Broader Consequences of Misallocation Some illustrative examples (misallocation + selection): Trade liberalizations Selection effects important in all the empirical studies of trade liberalizations (also important productivity effects of incumbents) Pavcnik (2002) for Chile Trefler (2004) for the Canada-US Free Trade Agreement Eslava, Haltiwanger, Kugler, and Kugler (2013) for Colombia Khandelwal, Schott, and Wei (2013): elimination of export quotas on Chinese textile and clothing by US, EU, and Canada in 2005, particularly government allocation of quotas to less productive state-owned enterprises; large TFP gain, 70% due to quota misallocation (selection) Restuccia Macro Growth and Development University of Oslo 71 / 77

72 Broader Consequences of Misallocation Some illustrative examples (misallocation + selection): Imperfect land markets (Adamopoulos, Brandt, Leight, and Restuccia 2017) Pattern of implicit distortions affect sector choice of highly productive farmers in addition to misallocation In China a 1.8-fold TFP gain in agriculture from eliminating misallocation translates into a 15-fold gain when accounting for selection Restuccia Macro Growth and Development University of Oslo 72 / 77

73 Broader Consequences of Misallocation Some illustrative examples (misallocation + technology): Trade liberalization and technology upgrading (Bustos 2011) Technology adoption and difussion (Ayerst 2016) Productivity investment and firm dynamics Restuccia Macro Growth and Development University of Oslo 73 / 77

74 Plant Life-Cycle Employment Growth AVERAGE EMPLOYMENT (AGE<5 = 1, LOG SCALE) 10 8 U.S Mexico 1 India < AGE Source: Hsieh and Klenow (2014) Restuccia Macro Growth and Development University of Oslo 74 / 77

75 Productivity Elasticity of Distortions GDP per Capita (log scale) USA ESP IRL SVN SVK CZE EST HUN HRVRUS POL LTU TTO KAZ PAN LVA MEX ROU TUR URYBGR ARG SRB MUS ZAF THA BRAUKR MKD COL ALB BIH PER ECU SLV DZA UVK GEO MNG PRY IDN MDAMAR NIC LKA BOL JOR PHL KGZ VNMHND IND PSE YEM GHA LAO BGD BEN UGANPL MDG ETH MWI Productivity Elasticity of Distortions Source: Bento and Restuccia (2017) Restuccia Macro Growth and Development University of Oslo 75 / 77

76 Productivity Investment and Firm Dynamics Bento and Restuccia (2017) Standard monopolistic competition framework extended to include: endogenous entry and entry-level and life-cycle productivity investment Prod. elasticity of distortions: 0.09 (US) 0.50 (India) Average Establishment Size 22 3 Entrant Productivity Life-cycle growth (%) Prod. investment share (%) Decomposition of agg. output: (a) Static misallocation (c) Endogenous life-cycle growth (d) Entrant investment Restuccia Macro Growth and Development University of Oslo 76 / 77

77 Conclusions Productivity at the core of cross-country differences in aggregate economic outcomes Misallocation quantitatively important in accounting for productivity differences but......there is not a single source of misallocation that can account for the bulk of differences Current work shows important link between misallocation and technology/selection channels in accounting for productivity differences More work is needed in quantifying the dynamic implications of misallocation Restuccia Macro Growth and Development University of Oslo 77 / 77