• Adamopoulos, T. et al., 2017. Misallocation, Selection and Productivity: A Quantitative Analysis with Panel Data from China, University of Toronto, Department of Economics. Available at: Link.
    • Abstract

      We use household-level panel data from China and a quantitative framework to document the extent and consequences of factor misallocation in agriculture. We find that there are substantial frictions in both the land and capital markets linked to land institutions in rural China that disproportionately constrain the more productive farmers. These frictions reduce aggregate agricultural productivity in China by affecting two key margins: (1) the allocation of resources across farmers (misallocation) and (2) the allocation of workers across sectors, in particular the type of farmers who operate in agriculture (selection). We show that selection can substantially amplify the static misallocation effect of distortionary policies by affecting occupational choices that worsen the distribution of productive units in agriculture.

  • Adamopoulos, T. & Restuccia, D., 2014. The Size Distribution of Farms and International Productivity Differences. American Economic Review, 104(6), pp.1667–97. Available at: Link.
    • Abstract

      We study the determinants of di fferences in farm-size across countries and their impact on agricultural and aggregate productivity using a quantitative sectoral model featuring a distribution of farms. Measured aggregate factors (capital, land, economy-wide productivity) account for ? of the observed differences in farm size and productivity. Policies and institutions that misallocate resources across farms have the potential to account for the remaining diff erences. Exploiting within-country variation in crop-specifi c price distortions and their correlation with farm size, we construct a cross-country measure of farm-size distortions which together with aggregate factors accounts for ? of the cross-country diff erences in size and productivity.

  • Banerjee, A.V. & Duflo, E., 2005. Growth Theory through the Lens of Development Economics. In P. Aghion & S. Durlauf, eds. Handbook of Economic Growth. Amsterdam: Elsevier, pp. 473–554.
    • Abstract

      Growth theory traditionally assumed the existence of an aggregate production function, whose existence and properties are closely tied to the assumption of optimal resource allocation within each economy. We show extensive evidence, culled from the micro- development literature, demonstrating that the assumption of optimal resource allocation fails radically. The key fact is the enormous heterogeneity of rates of return to the same factor within a single economy, a heterogeneity that dwarfs the cross-country heterogeneity in the economy-wide average return. Prima facie, we argue, this evidence poses problems for old and new growth theories alike. We then review the literature on various causes of this misallocation. We go on to calibrate a simple model which explicitly introduces the possibility of misallocation into an otherwise standard growth model . We show that, in order to match the data, it is not enough to have misallocated factors: there also needs to be important fixed costs in production. We conclude by outlining the contour of a possible non-aggregate growth theory, and review the existing attempts to take such a model to the data.

  • Bartelsman, E., Haltiwanger, J. & Scarpetta, S., 2013. Cross-Country Differences in Productivity: The Role of Allocation and Selection. American Economic Review, 103(1), pp.305–34.
    • Abstract

      This paper investigates the effect of idiosyncratic (firm-level) policy distortions on aggregate outcomes. Exploiting harmonized firm‑level data for a number of countries, we show that there is substantial and systematic cross‑country variation in the within-industry covariance between size and productivity. We develop a model in which heterogeneous firms face adjustment frictions (overhead labor and quasi-fixed capital) and distortions. The model can be readily calibrated so that variations in the distribution of distortions allow matching the observed cross-country moments. We show that the differences in the distortions that account for the size-productivity covariance imply substantial differences in aggregate performance. (JEL D24, L25, O47)

  • Basu, S. & Fernald, J., 2002. Aggregate Productivity and Aggregate Technology. European Economic Review, 46, pp.963–991.
    • Abstract

      Aggregate productivity and aggregate technology are meaningful but distinct concepts. We show that a slightly-modified Solow productivity residual measures changes in economic welfare, even when productivity and technology differ because of distortions such as imperfect competition. We then present a general accounting framework that identifies several new non-technological gaps between productivity and technology, gaps reflecting imperfections and frictions in output and factor markets. Empirically, we find that these gaps are important, even though we abstract from variations in factor utilization and estimate only small average sectoral markups. Compared with productivity growth, our measured technology shocks are significantly less correlated with output, and are essentially uncorrelated with inputs. Our results imply that calibrating dynamic general equilibrium models as if Solow residuals were technology shocks confuses impulses and propagation mechanisms.

  • Baumol, W.J. & Bowen, W.G., 1965. On the Performing Arts: The Anatomy of Their Economic Problems. The American Economic Review, 55(1/2), pp.495–502. Available at: Link.
  • Baumol, W.J., 2012. The Cost Disease: Why Computers Get Cheaper but Healthcare Doesn’t, New Haven, CT: Yale University Press.
  • Baumol, W.J., 1967. Macroeconomics of Unbalanced Growth: The Anatomy of Urban Crisis. The American Economic Review, 57(3), pp.415–426. Available at: Link.
  • Betts, C., Giri, R. & Verma, R., 2013. Trade, Reform, And Structural Transformation in South Korea, University Library of Munich, Germany. Available at: Link.
    • Abstract

      A two country, three sector hybrid model of structural change with distortionary government policies is used to quantify the impact of international trade and trade reform for industrialization. The model features Arming- ton motivated trade in agriculture and industry, and a novel representation of trade reform as a time sequence of import tariffs, export subsidies and lump sum government transfers of net tariff revenue. We calibrate our economy to data on South Korea and the OECD, inputting time series of country and sector specific labor productivity, tariffs and export subsidies which determine evolution of the effective pattern of comparative advantage. The model’s predicted reallocations of Korean labor from agriculture into industry and services from 1963 through 2000 are quantitatively similar to those in the data. Incorporating trade and measured Korean trade reform are both important for the accuracy of this predicted structural change, although interna- tional real income differences under non-homothetic preferences primarily determine trade and specialization patterns rather than comparative advantage. Counterfactually eliminating a) international trade b) interna- tional labor productivity differentials c) post 1967 Korean tariff reform and d) post 1967 industrial export subsidy reform increase the model’s SSE by 91 percent, 56 percent, 27 percent, and 62 percent respectively.

  • Buera, F.J. & Kaboski, J.P., 2012. The Rise of the Service Economy. American Economic Review, 102(6), pp.2540–69. Available at: Link.
    • Abstract

      This paper analyzes the role of specialized high-skilled labor in the disproportionate growth of the service sector. Empirically, the importance of skill-intensive services has risen during a period of increasing relative wages and quantities of high-skilled labor. We develop a theory in which demand shifts toward more skill- intensive output as productivity rises, increasing the importance of market services relative to home production. Consistent with the data, the theory predicts a rising level of skill, skill premium, and relative price of services that is linked to this skill premium. (JEL J24, L80, L90)

  • Buera, F.J. & Kaboski, J.P., 2009. Can Traditional Theories of Structural Change Fit The Data? Journal of the European Economic Association, 7(2-3), pp.469–477. Available at: Link.
  • Buera, F.J., Kaboski, J.P. & Shin, Y., 2011. Finance and Development: A Tale of Two Sectors. American Economic Review, 101(5), pp.1964–2002.
    • Abstract

      We develop a quantitative framework to explain the relationship between aggregate/sector-level total factor productivity (TFP) and financial development across countries. Financial frictions distort the allocation of capital and entrepreneurial talent across production units, adversely affecting measured productivity. In our model, sectors with larger scales of operation (e.g., manufacturing) have more financing needs, and are hence disproportionately vulnerable to financial frictions. Our quantitative analysis shows that financial frictions account for a substantial part of the observed cross-country differences in output per worker, aggregate TFP, sector-level relative productivity, and capital-to-output ratios. (JEL E23, E44, O41, O47)

  • Buera, F.J. & Shin, Y., 2013. Financial Frictions and the Persistence of History: A Quantitative Exploration. Journal of Political Economy, 121(2), pp.221–272.
    • Abstract

      We quantitatively analyze the role of financial frictions and resource misallocation in explaining development dynamics. Our model economy with financial frictions converges to the new steady state slowly after a reform triggers efficient reallocation of resources; the transition speed is half that of the conventional neoclassical model. Furthermore, in the model economy, investment rates and total factor pro- ductivity are initially low and increase over time. We present data from the so-called miracle economies on the evolution of macro aggregates, factor reallocation, and establishment size distribution that support the aggregate and micro-level implications of our theory.

  • Bustos, P., Caprettini, B. & Ponticelli, J., 2016. Agricultural Productivity and Structural Transformation: Evidence from Brazil. American Economic Review, 106(6), pp.1320–65. Available at: Link.
    • Abstract

      We study the effects of the adoption of new agricultural technologies on structural transformation. To guide empirical work, we present a simple model where the effect of agricultural productivity on industrial development depends on the factor-bias of technical change. We test the predictions of the model by studying the introduction of genetically engineered soybean seeds in Brazil, which had heterogeneous effects on agricultural productivity across areas with different soil and weather characteristics. We find that technical change in soy production was strongly labor-saving and led to industrial growth, as predicted by the model.

  • Chanda, A. & Dalgaard, C.-J., 2008. Dual economies and international total factor productivity differences: Channelling the impact from institutions, trade, and geography. Economica, 75(300), pp.629–661.
    • Abstract

      This paper shows that a significant part of measured total factor productivity (TFP) differ- ences across countries is attributable not to technological factors that affect the entire economy neutrally, but rather, to variations in the structural composition of economies. In particular, the allocation of scarce inputs between agriculture and non-agriculture is important. We pro- vide a framework which maps the composition of the economy to measured aggregate TFP. A decomposition analysis suggests that as much as 85 percent of the international variation in TFP can be attributed to the composition of output. Estimation exercises indicate that recent findings of the conduciveness of good institutions, and, to some extent trade, on levels of TFP, may be thus explained.

  • Chari, A.V., 2011. Identifying the Aggregate Productivity Effects of Entry and Size Restrictions: An Empirical Analysis of License Reform in India. American Economic Journal: Macroeconomics, 3, pp.66–96.
    • Abstract

      Distortions in the allocation of resources between heterogeneous pro- ducers have the potential to generate large reductions in aggregate productivity, a point that has been stressed by recent studies. There is, however, little direct empirical evidence from actual policy experi- ments on the magnitude of these effects. This paper proposes a simple methodology that empirically identifies the separate effects of entry and size restrictions on aggregate productivity, and uses it to analyse the impact of a policy reform in India.

  • De Loecker, J., 2011. Recovering markups from production data. International Journal of Industrial Organization, 29(3), pp.350–355. Available at: Link.
    • Abstract

      In this paper, I discuss, what I call, the Production-Approach to recovering markups. In contrast to the most popular approach in empirical IO, which relies on demand estimation, this approach requires standard production data while allowing for various price-setting models and puts no restrictions on underlying consumer demand. Using production data together with standard cost minimization allows a researcher to obtain markups in a flexible way. After presenting a brief and selective overview of the literature I contrast the production approach to that of the more popular demand estimation approach. This discussion makes it clear that both approaches face important trade-offs and at a minimum empirical economist should have both techniques as part of their toolbox. The hope is that the use of both methods will only depend on the data at hand and the relevant institutional knowledge, paired with the actual research question we are trying to answer.

  • Duarte, M. & Restuccia, D., 2010. The Role of the Structural Transformation in Aggregate Productivity. Quarterly Journal of Economics, 125(1), pp.129–173.
    • Abstract

      We investigate the role of sectoral labor productivity in explaining the process of structural transformation-the secular reallocation of labor across sectors-and the time path of aggregate productivity across countries. We measure sectoral labor productivity across countries using a model of the structural transformation. Productivity differences across countries are large in agriculture and services and smaller in manufacturing. Over time, productivity gaps have been substantially reduced in agriculture and industry but not nearly as much in services. These sectoral productivity patterns generate implications in the model that are broadly consistent with the cross-country data. We find that productivity catch-up in industry explains about 50% of the gains in aggregate productivity across countries, whereas low productivity in services and the lack of catch-up explain all the experiences of slowdown, stagnation, and decline observed across countries.

  • Echevarria, C., 1997. Changes in Sectoral Composition Associated with Economic Growth. International Economic Review, 38(2), pp.431–52.
  • Fernald, J. & Neiman, B., 2011. Growth Accounting with Misallocation: or, Doing Less with More in Singapore. American Economic Journal: Macroeconomics, 3(2), pp.29–74.
    • Abstract

      We derive aggregate growth-accounting implications for a two-sector economy with heterogeneous capital subsidies and monopoly power. In this economy, measures of total factor productivity (TFP) growth in terms of quantities (the primal) and real factor prices (the dual) can diverge from each other as well as from true technology growth. These distortions potentially give rise to dynamic reallocation effects that imply that change in technology needs to be measured from the bottom up rather than the top down. We show an example, for Singapore, of how incomplete data can be used to obtain estimates of aggregate and sectoral technology growth as well as reallocation effects. We also apply our framework to reconcile divergent TFP estimates in Singapore and to resolve other empirical puzzles regarding Asian development.

  • Foster, L., Haltiwanger, J. & Syverson, C., 2008. Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability? American Economic Review, 98(1), pp.394–425.
    • Abstract

      We investigate the nature of selection and productivity growth in industries where we observe producer-level quantities and prices separately. We show there are important differences between revenue and physical productivity. Because physical productivity is inversely correlated with price while revenue productivity is positively correlated with price, previous work linking (revenue- based) productivity to survival confounded the separate and opposing effects of technical efficiency and demand on survival, understating the true impacts of both. Further, we find that young producers charge lower prices than incumbents. Thus the literature understates new producers’ productivity advantages and entry’s contribution to aggregate productivity growth. (JEL D24, L11, L25)

  • Gollin, D., Jedwab, R. & Vollrath, D., 2016. Urbanization with and without industrialization. Journal of Economic Growth, 21(1), pp.35–70. Available at: Link.   Paper
    • Abstract

      We document a strong positive relationship between natural resource exports and urbanization in a sample of 116 developing nations over the period 1960–2010. In countries that are heavily dependent on resource exports, urbanization appears to be concentrated in “consumption cities” where the economies consist primarily of non-tradable services. These contrast with “production cities” that are more dependent on manufacturing in countries that have industrialized. Consumption cities in resource exporters also appear to perform worse along several measures of welfare. We offer a simple model of structural change that can explain the observed patterns of urbanization and the associated differences in city types. We note that although the development literature often assumes that urbanization is synonymous with industrialization, patterns differ markedly across developing countries. We discuss several possible implications for policy.

  • Gollin, D., Lagakos, D. & Waugh, M., 2014. The Agricultural Productivity Gap. Quarterly Journal of Economics, 129(2).
    • Abstract

      According to national accounts data for developing countries, value added per worker is on average four times higher in the non-agriculture sector than in agriculture. Taken at face value this “agricultural productivity gap” suggests that labor is greatly misallocated across sectors in the developing world. In this paper we draw on new micro evidence to ask to what extent the gap is still present when better measures of inputs and outputs are taken into consideration. We find that even after considering sector differences in hours worked and human capital per worker, urban-rural cost-of-living differences, and alternative measures of sector income from household survey data, a puzzlingly large agricultural productivity gap remains.

  • Graham, B. & Temple, J.R.W., 2006. Rich Nations, Poor Nations: How Much can Multiple Equilibria Explain? Journal of Economic Growth, 11(1), pp.5–41.
    • Abstract

      This paper asks whether the income gap between rich and poor nations can be explained by multiple equilibria. We explore the quantitative implications of a simple two-sector general equilibrium model that gives rise to multiplicity, and calibrate the model for 127 countries. Under the assumptions of the model, around a quarter of the world’s economies are found to be in a low output equilibrium. We also find that, since the output gains associated with an equilibrium switch are sizeable, the model can explain between 15 and 25% of the variation in the logarithm of GDP per worker across countries.

  • Guner, N., Ventura, G. & Yi, X., 2008. Macroeconomic Implications of Size-Dependent Policies. Review of Economic Dynamics, 11(4), pp.721–744.
    • Abstract

      Government policies that impose restrictions on the size of large establishments or firms, or promote small ones, are widespread across countries. In this paper, we develop a framework to systematically study policies of this class. We study a simple growth model with an endogenous size distribution of production units. We parameterize this model to account for the size distribution of establishments and for the large share of employment in large establishments. Then, we ask: quantitatively, how costly are policies that distort the size of production units? What is the impact of these policies on productivity measures, the equilibrium number of establishments and their size distribution? We find that these effects are potentially large: policies that reduce the average size of establishments by 20% lead to reductions in output and output per establishment up to 8.1% and 25.6% respectively, as well as large increases in the number of establishments (23.5%). (Copyright: Elsevier)

  • Hall, R.E., 1988. The Relation between Price and Marginal Cost in U.S. Industry. Journal of Political Economy, 96(5), pp.921–47. Available at: Link.
    • Abstract

      An examination of data on output and labor input reveals that some U.S. industries have marginal cost well below price. The conclusion rests on the finding that cyclical variations in labor input are small compared with variations in output. In booms, firms produce substantially more output and sell it for a price that exceeds the costs of the added inputs. This paper documents the disparity between price and marginal cost, where marginal cost is estimated from annual variations in cost. It considers a variety of explanations of the findings that are consistent with competition, but none is found to be completely plausible. Copyright 1988 by University of Chicago Press.

  • Hall, R.E., 1989. Invariance Properties of Solow’s Productivity Residual, National Bureau of Economic Research. Available at: Link.
    • Abstract

      In 1957, Robert Solow published a paper that provided the theoretical foundation for almost all subsequent work on productivity measurement. Although most applications of Solow’s method have measured trends over fairly long time periods, the method also has important uses at higher frequencies. Under constant returns to scale and competition, the Solow residual measures the pure shift of the production function. Shifts in product demand and factor supplies should have no effect on the residual. Tests of this invariance property show that it fails in a great many industries. Though other explanations may deserve some weight, it appears that the leading cause of the failure of invariance is increasing returns and market power. The empirical findings give some support to the theory of monopolistic competition.

  • Herrendorf, B., Rogerson, R. & Valentinyi, A., 2013. Two Perspectives on Preferences and Structural Transformation. American Economic Review.
    • Abstract

      We ask what specification of preferences can account for the changes in the expenditure shares of broad sectors that are associated with the process of structural transformation in the U.S. since 1947. Following the tradition of the expenditure systems literature, we first calibrate utility function parameters using NIPA data on final consumption expenditure. We find that a Stone-Geary specification fits the data well. While useful, this exercise does not tell the researcher what utility function to use in a model that posits sectoral production functions in value added form. We therefore develop a method to calculate the value added components of consumption categories that are consistent with value added production functions, and use these data to calibrate a utility function over sectoral consumption value added. We find that a Leontief specification fits the data well. Interestingly, the two specifications display very different properties: for final consumption expenditure income effects are the dominant force behind changes in expenditure shares whereas for consumption value added relative price effects are dominant.

  • Herrendorf, B., Rogerson, R. & Valentinyi, Á., 2014. Growth and Structural Transformation. In Handbook of Economic Growth. Handbook of Economic Growth. Elsevier, pp. 855–941. Available at: Link.
    • Abstract

      Structural transformation refers to the reallocation of economic activity across the broad sectors agriculture, manufacturing, and services. This review article synthesizes and evaluates recent advances in the research on structural transformation. We begin by presenting the stylized facts of structural transformation across time and space. We then develop a multi-sector extension of the one-sector growth model that encompasses the main existing theories of structural transformation. We argue that this multi-sector model serves as a natural benchmark to study structural transformation and that it is able to account for many salient features of structural transformation. We also argue that this multi-sector model delivers new and sharper insights for understanding economic development, regional income convergence, aggregate productivity trends, hours worked, business cycles, wage inequality, and greenhouse gas emissions. We conclude by suggesting several directions for future research on structural transformation.

  • Hicks, J.H. et al., 2017. Reevaluating Agricultural Productivity Gaps with Longitudinal Microdata, National Bureau of Economic Research. Available at: Link.
    • Abstract

      Recent research has pointed to large gaps in labor productivity between the agricultural and non-agricultural sectors in low-income countries, as well as between workers in rural and urban areas. Most estimates are based on national accounts or repeated cross-sections of micro-survey data, and as a result typically struggle to account for individual selection between sectors. This paper contributes to this literature using long-run individual-level panel data from two low-income countries (Indonesia and Kenya). Accounting for individual fixed effects leads to much smaller estimated productivity gains from moving into the non-agricultural sector (or urban areas), reducing estimated gaps by over 80 percent. Per capita consumption gaps between non-agricultural and agricultural sectors, as well as between urban and rural areas, are also close to zero once individual fixed effects are included. Estimated productivity gaps do not emerge up to five years after a move between sectors, nor are they larger in big cities. We evaluate whether these findings imply a re-assessment of the current conventional wisdom regarding sectoral gaps, discuss how to reconcile them with existing cross-sectional estimates, and consider implications for the desirability of sectoral reallocation of labor.

  • Hsieh, C.-T. & Klenow, P.J., 2009. Misallocation and Manufacturing TFP in China and India. Quarterly Journal of Economics, 124(4), pp.1403–1448.
    • Abstract

      Resource misallocation can lower aggregate total factor productivity (TFP). We use microdata on manufacturing establishments to quantify the potential extent of misallocation in China and India versus the United States. We measure sizable gaps in marginal products of labor and capital across plants within narrowly defined industries in China and India compared with the United States. When capital and labor are hypothetically reallocated to equalize marginal products to the extent observed in the United States, we calculate manufacturing TFP gains of 30%–50% in China and 40%–60% in India.

  • Jones, C.I., 2011. Misallocation, Economic Growth, and Input-Output Economics. NBER Working Papers, (16742).
    • Abstract

      One of the most important developments in the growth literature of the last decade is the enhanced appreciation of the role that the misallocation of resources plays in helping us understand income differences across countries. Misallocation at the micro level typically reduces total factor productivity at the macro level. Quantifying these effects is leading growth researchers in new directions, two examples being the extensive use of firm-level data and the exploration of input-output tables, and promises to yield new insights on why some countries are so much richer than others.

  • Kongasmut, P., Rebelo, S. & Xie, D., 2001. Beyond Balanced Growth. Review of Economic Studies, 68(4), pp.869–882.
  • Lagakos, D., 2016. Explaining Cross-Country Productivity Differences in Retail Trade. Journal of Political Economy, 124(2), pp.579–620. Available at: Link.
    • Abstract

      Many macroeconomists 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, 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. The theory implies that policies that increase measured retail productivity do not necessarily increase welfare.

  • Lagakos, D. & Waugh, M., 2013. Selection, Agriculture, and Cross-Country Productivity Differences. American Economic Review, 103(2), pp.948–80.
    • Abstract

      Cross-country labor productivity differences are larger in agriculture than in non-agriculture. We propose a new explanation for these patterns in which the self-selection of heterogeneous workers determines sector productivity. We formalize our theory in a general-equilibrium Roy model in which preferences feature a subsistence food requirement. In the model, subsistence requirements induce workers that are relatively unproductive at agricultural work to nonetheless select into the agriculture sector in poor countries. When parameterized, the model predicts that productivity differences are roughly twice as large in agriculture as non-agriculture even when countries differ by an economy-wide efficiency term that affects both sectors uniformly.

  • Lewis, A., 1954. Economic Development with Unlimited Supplies of Labour. The Manchester School, 22(2), pp.139–191. Available at: Link.
  • Martin, W. & Mitra, D., 2001. Productivity Growth and Convergence in Agriculture versus Manufacturing. Economic Development and Cultural Change, 49(2), pp.403–22. Available at: Link.
    • Abstract

      No abstract is available for this item.

  • Matsuyama, K., 2002. The Rise of Mass Consumption Societies. Journal of Political Economy, 110(5), pp.1035–1070. Available at: Link.
  • McMillan, M., Rodrik, D. & Verduzco-Gallo, Íñigo, 2014. Globalization, Structural Change, and Productivity Growth, with an Update on Africa. World Development, 63, pp.11–32. Available at: Link.
  • Michaels, G., Rauch, F. & Redding, S.J., 2012. Urbanization and Structural Transformation. The Quarterly Journal of Economics, 127(2), pp.535–586. Available at: Link.
    • Abstract

      We examine urbanization using new data that allow us to track the evolution of population in rural and urban areas in the United States from 1880 to 2000. We find a positive correlation between initial population density and subsequent population growth for intermediate densities, which increases the dispersion of the population density distribution over time. We use theory and empirical evidence to show this pattern of population growth is the result of differences in agriculture’s initial share of employment across population densities, combined with structural transformation that shifts employment away from agriculture. Copyright 2012, Oxford University Press.

  • Ngai, R.L. & Pissarides, C.A., 2007. Structural Change in a Multisector Model of Growth. American Economic Review, 97(1), pp.429–443. Available at: Link.
  • Peters, M., 2013. Heterogeneous mark-ups, growth and endogenous misallocation, London School of Economics and Political Science, LSE Library.
    • Abstract

      The recent work on misallocation argues that aggregate productivity in poor countries is low because various market frictions prevent marginal products from being equalized. By focusing on such allocative inefficiencies, misallocation is construed as a purely static phenomenon. This paper argues that misallocation also has dynamic consequences because it interacts with firms’ innovation and entry decisions, which determine the economy’s growth rate. To study this link between misallocation and growth, I construct a tractable endogenous growth model with heterogeneous firms, where misallocation stems from imperfectly competitive output markets. The model has an analytical solution and hence makes precise predictions about the relationship between growth, misallocation and welfare. It stresses the importance of entry. An increase in entry reduces misallocation by fostering competition. If entry also increases the economy-wide growth rate, static misallocation and growth are negatively correlated. The welfare consequences of misallocation might therefore be much larger once these dynamic considerations are taken into account. Using firm-level panel data from Indonesia, I present reduced form evidence for the importance of imperfect output market and calibrate the structural parameters. A policy, which reduces existing entry barriers, increases growth and reduces misallocation. The dynamic growth effects are more than four times as large as their static counterpart.

  • Petrin, A., Reiter, J. & White, K., 2011. The Impact of Plant-level Resource Reallocations and Technical Progress on U.S. Macroeconomic Growth. Review of Economic Dynamics, 14(1), pp.3–26.
    • Abstract

      We build up from the plant level an aggregate(d) Solow residual by estimating every U.S. manufacturing plant’s contribution to the change in aggregate final demand between 1976 and 1996. Our framework uses the Petrin and Levinsohn (2010) definition of aggregate productivity growth, which aggregates plant-level changes to changes in aggregate final demand in the presence of imperfect competition and other distortions and frictions. We decompose these contributions into plant-level resource reallocations and plant-level technical efficiency changes while allowing in the estimation for 459 different production technologies, one for each 4-digit SIC code. On average we find positive aggregate productivity growth of 2.2% in this sector during this period of declining share in U.S. GDP. We find that aggregate reallocation made a larger contribution to growth than aggregate technical efficiency. Our estimates of the contribution of reallocation range from 1.7% to 2.1% per year, while our estimates of the average contribution of aggregate technical efficiency growth range from 0.2% to 0.6% per year. In terms of cyclicality, the aggregate technical efficiency component has a standard deviation that is roughly 50% to 100% larger than that of aggregate total reallocation, pointing to an important role for technical efficiency in macroeconomic fluctuations. Aggregate reallocation is negative in only 3 of the 20 years of our sample, suggesting that the movement of inputs to more highly valued activities on average plays a stabilizing role in manufacturing growth. Our results have implications for both the theoretical literature on growth and alternative indexes of aggregate productivity growth based only on technical efficiency. (Copyright: Elsevier)

  • Petrin, A. & Srinivasan, J., 2013. Estimating Lost Output from Allocative Inefficiency, with Application to Chile and Firing Costs. Review of Economics and Statistics, 95(1), pp.286–301.
    • Abstract

      We propose a new measure of allocative efficiency based on unrealized increases in aggregate productivity growth. We show that the difference in the value of the marginal product of an input and its marginal cost at any plant—the plant-input gap—is exactly equal to the change in aggregate output that would occur if that plant changed that input’s use by one unit. We show how to estimate this gap using plant-level data for 1982 to 1994 from Chilean manufacturing. We find the gaps for blue- and white-collar labor are quite large in absolute value, and these gaps (unlike for materials and electricity) are increasing over time. The timing of the sharpest increases in the labor gaps suggests that they may be related to increases in severance pay.

  • Restuccia, D. & Rogerson, R., 2008. Policy Distortions and Aggregate Productivity with Heterogeneous Plants. Review of Economic Dynamics, 11(4), pp.707–720.
    • Abstract

      We formulate a version of the growth model in which production is carried out by heterogeneous establishments and calibrate it to U.S. data. In the context of this model we argue that differences in the allocation of resources across establishments that differ in productivity may be an important factor in accounting for cross-country 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 total factor productivity (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.

  • Restuccia, D. & Santaeulalia-Llopis, R., 2015. Land Misallocation and Productivity, University of Toronto, Department of Economics. Available at: Link.
    • Abstract

      Using detailed household-farm level data from Malawi, we measure real farm total factor productivity (TFP) controlling for a wide array of factor inputs, land quality, and transitory shocks. The distribution of farm TFP has substantial dispersion but factor inputs are roughly evenly spread among farmers. The striking fact is that operated land size and capital are essentially unrelated to farm TFP implying a strong negative effect on agricultural productivity. A reallocation of factors to their efficient use among existing farmers would increase agricultural productivity by a factor of 3.6-fold. We relate factor misallocation to severely restricted land markets as the vast majority of land is without a title and a very small portion of operated land is rented in. The gains from reallocation are 2.6 times larger for farms with no marketed land than for farms that operate marketed land.

  • Rodrik, D. & McMillan, M.S., 2011. Globalization, Structural Change and Productivity Growth.
    • Abstract

      Large gaps in labor productivity between the traditional and modern parts of the economy are a fundamental reality of developing societies. In this paper, we document these gaps, and emphasize that labor flows from low-productivity activities to high-productivity activities are a key driver of development. Our results show that since 1990 structural change has been growth reducing in both Africa and Latin America, with the most striking changes taking place in Latin America. The bulk of the difference between these countries’ productivity performance and that of Asia is accounted for by differences in the pattern of structural change – with labor moving from low- to high-productivity sectors in Asia, but in the opposite direction in Latin America and Africa. In our empirical work, we identify three factors that help determine whether (and the extent to which) structural change contributes to overall productivity growth. In countries with a relatively large share of natural resources in exports, structural change has typically been growth reducing. Even though these “enclave” sectors usually operate at very high productivity, they cannot absorb the surplus labor from agriculture. By contrast, competitive or undervalued exchange rates and labor market flexibility have contributed to growth enhancing structural change.

  • Sposi, M.J., 2015. Evolving comparative advantage, sectoral linkages, and structural change, Federal Reserve Bank of Dallas. Available at: Link.
    • Abstract

      I quantitatively examine the effects of location-and sector-specific productivity growth on structural change across countries from 1970-2011. The results shed new light on the “hump shape" in industry’s share in GDP across levels of development. There are two key features. First, otherwise identical changes in the composition of final demand translate differently into changes in the composition of value added because of systematic differences in sectoral linkages. Second, the mapping between sector-specific productivity and the composition of final demand systematically differs because of the relative importance of two components within final demand: final domestic expenditures and net exports.

  • Swiecki, T., 2017. Determinants of Structural Change. Review of Economic Dynamics, 24, pp.95–131. Available at: Link.
    • Abstract

      In this paper I ask which of the multiple mechanisms suggested in the literature are quantitatively important for understanding the process of structural change. I build a model combining four forces in a common framework: (i) sector-biased technological progress, (ii) nonhomothetic tastes, (iii) international trade and (iv) changing wedges between factor costs across sectors. I calibrate the model using the data for 45 diverse countries over the period 1970-2005 and use counterfactual simulations of the model to systematically assess the relative importance of the four determinants of structural change. I find that sector-biased technological change is overall the most important mechanism and it is essential for understanding the decline of manufacturing labor share and the corresponding growth in services in developed countries. Nonhomothetic preferences are key to accounting for movement of labor out of agriculture, which matters primarily for poorer countries. International trade and changes in relative factor costs across sectors are important for individual countries but their impact on the relocation of labor is less systematic. I also show that a model with homothetic preferences would overstate the importance of agriculture in accounting for differences in aggregate productivity across countries and over time. (Copyright: Elsevier)

  • Syverson, C., 2004. Product Substitutability and Productivity Dispersion. Review of Economics and Statistics, 86(2), pp.534–550.
    • Abstract

      Tremendous differences in producer productivity levels exist, even within narrowly defined industries. This paper explores the influence of product substitutability in an industry on this disparity. When consumers can easily switch between producers, inefficient (high-cost) producers cannot operate profitably. Thus high-substitutability industries should exhibit less productivity dispersion and have higher average productivity levels. I demonstrate this mechanism in a simple industry equilibrium model and test it empirically using producer-level data from 443 U.S. manufacturing industries. I find evidence that substitutability measured in several ways’is indeed negatively related to within-industry productivity dispersion and positively related to median productivity.

  • Timmer, M.P. & de Vries, G.J., 2009. Structural change and growth accelerations in Asia and Latin America: a new sectoral data set. Cliometrica, 3(2), pp.165–190.
    • Abstract

      Recent studies of economic growth have moved from explaining average trends in long-term growth to study growth accelerations and decelerations. In this paper we argue that the standard shift-share analysis is inadequate to measure the contribution of sectors to accelerations in productivity. We present a modified shift-share method, which takes account of surplus labour in agriculture and accounts for the contribution to growth from expanding sectors. We apply this novel methodology to the GGDC 10-sector database, which is a new data set with annual time series of value added and persons employed for the ten main sectors of the economy. The data set covers 19 countries in Asia and Latin America spanning the period from 1950 to 2005. We find that growth accelerations are explained by productivity increases within sectors, not by reallocation of employment to more productive sectors. Challenging conventional wisdom, productivity improvement in market services is more important than productivity growth in manufacturing.

  • Timmer, M.P. & de Vries, G.J., 2007. A Cross-Country Database for Sectoral Employment and Productivity in Asia and Latin America, 1950-2005.
  • Uy, T., Yi, K.-M. & Zhang, J., 2013. Structural change in an open economy. Journal of Monetary Economics, 60(6), pp.667–682. Available at: Link.
    • Abstract

      We study the importance of international trade in structural change. Our framework has both productivity and trade cost shocks, and allows for non-unitary income and substitution elasticities. We calibrate our model to investigate South Korea’s structural change between 1971 and 2005. We find that the shock processes, propagated through the model’s two main transmission mechanisms, non-homothetic preferences and the open economy, explain virtually all of the evolution of agriculture and services labor shares, and the rising part of the hump-shape in manufacturing. Counterfactual exercises show that the role of the open economy is quantitatively important for explaining South Korea’s structural change.

  • Vollrath, D., 2014. The Efficiency of Human Capital Allocations in Developing Countries. Journal of Development Economics, 108, pp.106–118.   Paper
    • Abstract

      For a set of 14 developing countries I evaluate whether differences in the marginal product of human capital between sectors - estimated from individual-level wage data - have meaningful effects on aggregate productivity. Under the most generous assumptions regarding the homogeneity of human capital, my analysis shows that equalizing the marginal product of human capital between sectors leads to gains in output of less than 5% for most countries. These estimated gains of reallocation represent an upper bound as some of the observed differences in marginal products between sectors are due to unmeasured human capital. Under reasonable assumptions on the amount of unmeasured human capital the gains from reallocation fall well below 3%. Compared to similar estimates made using data from the U.S., developing countries would gain more from a reallocation of human capital, but the differences are too small to account for a meaningful portion of the gap in income per capita with the United States.

  • Vollrath, D., 2013. Measuring Aggregate Agricultural Labor Effort in Dual Economies. Eurasian Economic Review, 3(1), pp.39–58. Available at: Link.   Paper
    • Abstract

      Wide differences in labor productivity are observed between agriculture and industry in most developing countries. Research suggests that these differences - often denoted a “dual economy” effect — can explain a significant portion of low output per capita levels in these countries. A central input to the labor productivity calculation is the aggregate labor effort in the agricultural sector. Using findings from the Rural Income Generating Activity (RIGA) database, I reconsider the measure of labor productivity in agriculture and industry. I use several methods to extract information on labor effort and human capital from the household data in RIGA, and this is used to estimate the aggregate labor effort in the agricultural sector. With these new estimates, dual economy effects are found to be less severe for most of the RIGA countries. Using these estimates to adjust a wider sample of country-level data shows that the share of variation in output per capita explained by dual economy effects is around half of previous estimates. Copyright Eurasia Business and Economics Society 2013

  • Vollrath, D., 2009. How important are dual economy effects for aggregate productivity? Journal of Development Economics, 88(2), pp.325–334.   Paper
    • Abstract

      This paper brings together development accounting techniques and the dual economy model to address the role that factor markets have in creating variation in aggregate total factor productivity (TFP). Development accounting research has shown that much of the variation in income across countries can be attributed to differences in TFP. The dual economy model suggests that aggregate productivity is depressed by having too many factors allocated to low productivity work in agriculture. Data show large differences in marginal products of similar factors within many developing countries, offering prima facie evidence of this misallocation. Using a simple two-sector decomposition of the economy, this article estimates the role of these misallocations in accounting for the cross-country income distribution. A key contribution is the ability to bring sector specific data on human and physical capital stocks to the analysis. Variation across countries in the degree of misallocation is shown to account for 30 — 40% of the variation in income per capita, and up to 80% of the variation in aggregate TFP.

  • Young, A., 2014. Structural Transformation, the Mismeasurement of Productivity Growth, and the Cost Disease of Services. American Economic Review, 104(11), pp.3635–67. Available at: Link.
    • Abstract

      If workers self-select into industries based upon their relative productivity in different tasks, and comparative advantage is aligned with absolute advantage, then the average efficacy of a sector’s workforce will be negatively correlated with its employment share. This might explain the difference in the reported productivity growth of contracting goods and expanding services. Instrumenting with defense expenditures, I find the elasticity of worker efficacy with respect to employment shares is substantially negative, albeit imprecisely estimated. The estimates suggest that the view that goods and services have similar productivity growth rates is a plausible alternative characterization of growth in developed economies.

  • Ziebarth, N., 2013. Are China and India Backwards? Evidence from the 19th Century U.S. Census of Manufactures. Review of Economic Dynamics, 16(1), pp.86–99.
    • Abstract

      Hsieh and Klenow (2009) argue that a large fraction of aggregate TFP differences between the U.S. and the developing countries of China and India can be explained by factor misallocation. Their interpretation is that this misallocation is due to institutions and policies in these developing countries that redirect resources from productive to unproductive firms. Using the U.S. Census of Manufactures from the late 19th century, I find that the level of dispersion in these modern, less developed countries is very similar to that in the 19th century U.S. What is similar about the countries is their level of development not the existence of institutions that Hsieh and Klenow (2009) emphasize such as state owned enterprises as in China or entry restrictions as in India. These results suggest that the institutional basis of misallocation potentially goes beyond these overtly distortionary policies. I apply their accounting procedure to the U.S. and find that between 4% and 7% of total manufacturing TFP growth in the 20th century can be attributed to a more efficient intra-industry allocation of resources. I conclude by discussing some other explanations for these results including differences in transportation networks and lack of competitive regulation. (Copyright: Elsevier)

  • De Loecker, J. & Warzynski, F., 2012. Markups and Firm-Level Export Status. American Economic Review, 102(6), pp.2437–71. Available at: Link.
    • Abstract

      In this paper, we develop a method to estimate markups using plant-level production data. Our approach relies on cost-minimizing producers and the existence of at least one variable input of production. The suggested empirical framework relies on the estimation of a production function and provides estimates of plant-level markups without specifying how firms compete in the product market. We rely on our method to explore the relationship between markups and export behavior. We find that markups are estimated significantly higher when controlling for unobserved productivity; that exporters charge, on average, higher markups and that markups increase upon export entry. (JEL D22, D24, F14, L11, L60)