Policy Distortions and Aggregate Productivity with Heterogeneous Plants

Abstract

We formulate a version of the growth model in which production is carried out by heterogeneous plants and calibrate it to US data. In the context of this model we argue that differences in the allocation of resources across heterogeneous plants may be an important factor in accounting for crosscountry differences in output per capita. In particular, we show that policies which create heterogeneity in the prices faced by individual producers can lead to sizeable decreases in output and measured TFP in the range of 30 to 50 percent. We show that these effects can result from policies that do not rely on aggregate capital accumulation or aggregate relative price differences. More generally, the model can be used to generate differences in capital accumulation, relative prices, and measured TFP.

Biased Technical Change, Intermediate Goods, and Total Factor Productivity

“…Finally, note that TFP is linear in A in (17). The result is in contrast with the standard view, which suggests that an increase in productivity in one sector spreads to other sectors through the input-output matrix, creating a multiplier e¤ect on aggregate TFP.…”

Capital Misallocation During the Great Recession

“…They show that policy distortions that create heterogeneity in the prices faced by individual producers lead to misallocation of resources across heterogeneous plants, and as a result can lead to sizable decreases in output and measured TFP. However, di¤erently from my work, Restuccia and Rogerson (2008) focus their attention only on the steady-state distribution of …rms and therefore are silent about the impact of policy distortions on reallocation during economic downturns. Midrigan and Xu (2014) also study the impact of …nancing frictions on misallocation and focus in particular on two distinct channels: borrowing costs distorting the entry decision of …rms and borrowing costs distorting the allocation of capital among …rms with di¤erent productivities.…”

“…A seminal contribution in this …eld is Hopenhayn and Rogerson (1993): using the Hopenhayn (1992) model of …rm dynamics they quantify the aggregate TFP loss due to …ring costs. A non-exhaustive list of more recent works comprises , , Guner et al (2008), Hsieh andKlenow (2009), Restuccia andRogerson (2008) and Midrigan and Xu (2014). Much of this literature however emphasizes the role of frictions and policies in the cross-country di¤erence in long-run TFP and, therefore, abstracts from the cyclical dynamics of misallocation.…”

“…They interpret the gap in marginal revenue product of capital between di¤erent establishments as evidence of misallocation; their calculations imply that if capital and labor were hypothetically reallocated to equalize marginal products to the extent observed in the US, manufacturing TFP would increase by 30-40% in China and by 40-60% in India. Restuccia and Rogerson (2008) explore the quantitative impact of policy distortions on aggregate productivity in a stationary equilibrium with heterogeneous plants. They show that policy distortions that create heterogeneity in the prices faced by individual producers lead to misallocation of resources across heterogeneous plants, and as a result can lead to sizable decreases in output and measured TFP.…”

Misallocation, Economic Growth, and Input–Output Economics

“…As in Chari, Kehoe and McGrattan (2007), Hsieh andKlenow (2009), Lagos (2006), and Restuccia and Rogerson (2008), distortions at the micro (here sectoral) level can aggregate up to provide differences in TFP. For simplicity, we model these distortions as sector-specific reductions in revenue, denoted τ i .…”