Does Higher Productivity Dispersion Imply Greater Misallocation? A Theoretical and Empirical Analysis

44 Pages Posted: 6 Oct 2016 Last revised: 20 Nov 2016

J. David Brown

US Census Bureau Center for Economic Studies; IZA Institute of Labor Economics

Emin Dinlersoz

Center for Economic Studies - US Census Bureau

John S. Earle

George Mason University - Schar School of Policy and Government; IZA Institute of Labor Economics

Date Written: November 1, 2016

Abstract

Recent research maintains that the observed variation in productivity within industries reflects resource misallocation and concludes that large GDP gains may be obtained from market-liberalizing polices. Our theoretical analysis examines the impact on productivity dispersion of reallocation frictions in the form of costs of entry, operation, and restructuring, and shows that reforms reducing these frictions may raise dispersion of productivity across firms. The model does not imply a negative relationship between aggregate productivity and productivity dispersion. Our empirical analysis focuses on episodes of liberalizing policy reforms in the U.S. and six East European transition economies. Deregulation of U.S. telecommunications equipment manufacturing is associated with increased, not reduced, productivity dispersion, and every transition economy in our sample shows a sharp rise in dispersion after liberalization. Productivity dispersion under central planning is similar to that in the U.S., and it rises faster in countries adopting faster paces of liberalization. Lagged productivity dispersion predicts higher future productivity growth. The analysis suggests there is no simple relationship between the policy environment and productivity dispersion.

Keywords: misallocation, productivity, reallocation, liberalization, deregulation

JEL Classification: D2, O47

Suggested Citation

Brown, J. David and Dinlersoz, Emin and Earle, John S., Does Higher Productivity Dispersion Imply Greater Misallocation? A Theoretical and Empirical Analysis (November 1, 2016). US Census Bureau Center for Economic Studies Paper No. CES-WP-16-42. Available at SSRN: https://ssrn.com/abstract=2847280

J. David Brown

US Census Bureau Center for Economic Studies ( email )

4600 Silver Hill Road
Washington, DC 20233
United States
301-763-8769 (Phone)
301-763-5935 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Emin Dinlersoz

Center for Economic Studies - US Census Bureau ( email )

4600 Silver Hill Road
Washington, DC 20233
United States

John S. Earle (Contact Author)

George Mason University - Schar School of Policy and Government ( email )

3351 Fairfax Drive
MS 3B1
Arlington, VA 22201
United States
703-993-8023 (Phone)

HOME PAGE: http://earle.gmu.edu

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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