Productivity Volatility and the Misallocation of Resources in Developing Economies

33 Pages Posted: 5 Jul 2011 Last revised: 6 Dec 2024

See all articles by Allan Collard-Wexler

Allan Collard-Wexler

Duke University

John Asker

UCLA

Jan De Loecker

Princeton University - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: June 2011

Abstract

We investigate the role of dynamic production inputs and their associated adjustment costs in shaping the dispersion of total factor productivity (TFP) and static measures of capital misallocation within a country. Using data on 5,010 establishments in 33 developing countries from the World Bank's Enterprise Research Data, we find that countries exhibiting greater time-series volatility of productivity are also characterized by greater cross-sectional dispersion in productivity. Volatility in TFP explains one quarter to one third of cross-country productivity dispersion. We document a similar relationship between productivity volatility and the dispersion of the marginal revenue product of capital (static capital misallocation). We then use a standard model of investment with adjustment costs, parameterized using numbers calibrated to U.S. data, to show that increasing the volatility of productivity to the level observed in these developing economies can quantitatively replicate the observed relationship between static misallocation and volatility observed in the data. We find that sixty-one percent of the static capital misallocation in the data is captured by the model's prediction. Our findings suggest that the dynamic process governing productivity shocks is a first-order determinant of differences in misallocation and, hence, income across countries.

Suggested Citation

Collard-Wexler, Allan and Asker, John William and De Loecker, Jan, Productivity Volatility and the Misallocation of Resources in Developing Economies (June 2011). NBER Working Paper No. w17175, Available at SSRN: https://ssrn.com/abstract=1879037

Allan Collard-Wexler (Contact Author)

Duke University ( email )

100 Fuqua Drive
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John William Asker

UCLA ( email )

8283 Bunche Hall
Los Angeles, CA 90095-1477
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Jan De Loecker

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://pages.stern.nyu.edu/~jdeloeck/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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