Misallocation, Establishment Size, and Productivity
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.
We thank David Atkin, Nick Bloom, Margarida Duarte, Peter Klenow, Virgiliu Midrigan, Michael Peters, Xiaodong Zhu, two anonymous referees, and several seminar and conference participants for helpful comments. All remaining errors are our own. Restuccia gratefully acknowledges the financial support from the Canadian Research Chairs program and the Social Sciences and Humanities Research Council of Canada. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Pedro Bento & Diego Restuccia, 2017. "Misallocation, Establishment Size, and Productivity," American Economic Journal: Macroeconomics, vol 9(3), pages 267-303. citation courtesy of