Heterogeneous Mark-Ups and Endogenous Misallocation [Job Market Paper]
Aggregate total factor productivity depends both on firms’ physical productivity (technology) and on the efficiency of the resource allocation. The empirical regularity that cross-sectional productivity differences are more pronounced in underdeveloped economies is often interpreted as evidence for the importance of misallocation to explain the cross-country variation in TFP. This paper argues, that this finding is also informative about differences in technology. I construct a simple endogenous growth model, where the cross-sectional distribution of productivity and the growth rate of aggregate TFP are jointly determined. As output markets are imperfectly competitive, the cross-sectional productivity dispersion will reflect the distribution of mark-ups. Mark-ups not only cause static misallocation, but they also determine innovation and entry incentives and hence the equilibrium growth rate. If equilibrium entry is intense (for example because entry barriers are low), product markets are competitive, the productivity dispersion across firms is small and the aggregate growth rate is high. The cross-country variation in productivity dispersion might therefore be a symptom of fundamental differences in the innovation environment. Using firm-level data from Indonesia, I present both reduced form evidence for this mechanism and estimate the models’ structural parameters. A policy, which reduces existing entry barriers by 10%, will increase welfare by 5%. While 10% of these gains are attributed to a reduction of static misallocation, 60% stem from a change in the equilibrium growth rate.
Firm Heterogeneity and Import Behavior: Evidence from French Firms (with Joaquin Blaum and Claire Lelarge) [new draft available soon]
What ingredients should a model of import behavior have in order to be consistent with the firm-level evidence? To answer this question, we build a simple model where productivity differences are the only source of firm-level heterogeneity and prices, fixed costs and input qualities are common across firms. Using a comprehensive dataset of French manufacturing firms, we then test the qualitative predictions of such model. On the extensive margin, the model correctly predicts that firm-level productivity positively correlates with the number of imported products and the number of varieties per product. On the intensive margin, the model fares well in describing importers’ expenditures across imported varieties, but fails to account for the pattern of expenditure between domestic and foreign inputs. We conclude that a mechanism inducing firm-level heterogeneity in the effective relative price of domestic vs. foreign varieties is needed to successfully model import demand.
Why Do Inefficient Firms Survive? Management and Economic Development [please send me an eMail for the draft]
There are large and persistent productivity differences across firms within narrowly defined industries. This is especially true in poor countries. Why do productivity differences decline as the economy develops? In this paper I propose a theory where productivity differences exist because different firms use different technologies. The negative correlation between economic development and productivity dispersion occurs because the set of economically viable techniques shrinks as the economy develops. My mechanism stresses the role of managerial inputs. If managers are essential to increase the scale of production, inefficient techniques survive in managerial-scarce economies, as productive firms do not have the means to replace them. As the aggregate supply of managers increases, efficient firms expand, best-practice technologies dominate the industry and productivity differences decline. Using firm-level data from Chile, I test both cross-sectional and time-series implications of the theory.