Explaining Cross-Country Productivity Differences in Retail Trade

Abstract

Many macro-economists argue that productivity is low in developing countries because of frictions that impede the adoption of modern technologies. I argue that in the retail trade sector, which employs just under twenty percent of the workforce on average, developing countries rationally choose technologies with low measured labor productivity. My theory is that the adoption of modern retail technologies is optimal only when household ownership of complementary durable goods, such as cars, is widespread. Because income is low in the developing world, households own few such durables; hence, retail trade is dominated by traditional technologies with low measured productivity. I show that an implication of this theory is that policies that lead to large increases in measured retail productivity do not necessarily lead to large increases in welfare.

Keywords: macroeconomics, productivity, technology adoption, retail trade, informality, home production

JEL Classification: O11, O40, E26, L81