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Cross-Country Differences in Productivity: The Role of Allocation and Selection

Eric Bartelsman, John Haltiwanger, Stefano Scarpetta
2013 The American Economic Review  
Cross-Country Differences in Productivity: The Role of Allocation and Selection * This paper combines different strands of the productivity literature to investigate the effect of idiosyncratic (firm-level) policy distortions on aggregate outcomes. On the one hand, a growing body of empirical research has been relating cross-country differences in key economic outcomes, such as productivity or output per capita, to differences in policies and institutions that shape the business environment. On
more » ... ess environment. On the other hand, a branch of empirical research has attempted to shed light on the determinants of productivity at the firm-level and the evolution of the distribution of productivity across firms within each industry. In this paper, we exploit a rich source of data with harmonized statistics on firm level variation within industries for a number of countries. Our key empirical finding is that there is substantial variation in the within-industry covariance between size and productivity across countries, and this variation is affected by the presence of idiosyncratic distortions. We develop a model in which heterogeneous firms face adjustment frictions (overhead labor and quasi-fixed capital) and idiosyncratic distortions. We show that the model can be readily calibrated to match the observed cross-country patterns of the within-industry covariance between productivity and size and thus help to explain the observed differences in aggregate performance. NON-TECHNICAL SUMMARY This paper sheds light on the role of policy-induced distortions in the allocation of resources for productivity growth. It exploits a rich source of data with harmonized statistics on firm level variation in productivity and size within each industry for a number of countries. It shows that the observed cross-country variation in the correlation between firms' size and their productivity, within-industry, can be explained by the presence of idiosyncratic distortions. The paper presents a theoretical model in which heterogeneous firms face adjustment frictions (overhead labor and quasi-fixed capital) and idiosyncratic distortions. The model can be readily calibrated to match the observed cross-country patterns of the within-industry covariance between productivity and size and thus help to explain the observed differences in aggregate performance. JEL Classification: E02, L11, L16, L2, L25, O4, O57
doi:10.1257/aer.103.1.305 fatcat:5wrdbyymyzb47oz3o27xptupte