Productivity Volatility and the Misallocation of Resources in Developing Economies
We investigate the role of dynamic production inputs and their associated adjustment costs in shaping the dispersion of total factor productivity and static measures of capital misallocation within a country. Using data on 5,019 establishments in 33 developing countries from the World Bank’s Enterprise Research Data, we find that countries exhibiting greater time-series volatility of productivity have greater cross-sectional dispersion in both productivity and marginal revenue product of capital. We use a standard model of investment with adjustment costs to show that increasing the volatility of productivity to the level observed in these developing economies can quantitatively replicate this relationship.
This paper was presented at the Financial Systems, Industrial Organization, and Economic Development Workshop in April of 2012. The corresponding presentation is also available.