In progress (selected)

Firing Costs, Misallocation, and Aggregate Productivity with M. Mendes Tavares and D. Restuccia, No 23008, NBER Working Papers (2016), forthcoming Journal of Economic Dynamics and Control [2017 Impact Factor: 1.579. Q2 (114/353), Economics]   - click here.

We study the impact of firing costs on aggregate total factor productivity (TFP) in a dynamic general-equilibrium framework where the evolution of establishment-level productivity is not invariant to the policy. Firing costs not only generate static factor misallocation, but also distort the selection of establishment’s growth by size, contributing to larger aggregate TFP losses. Numerical experiments indicate that firing costs equivalent to 5 year’s wages imply a reduction in TFP of more than 20 percent. Factor misallocation accounts for 20 percent of the productivity loss, whereas the remaining 80 percent arises from distorted selection in the productivity process.

Policy Distortions and Aggregate Productivity with Endogenous Establishment-Level Productivity with M. Mendes Tavares and D. Restuccia, No 23339, NBER Working Papers (2017)   - click here.

What accounts for differences in output per capita and total factor productivity (TFP) across countries? Empirical evidence points to resource misallocation across heterogeneous production units as an important factor. We study resource misallocation in a model where establishment-level productivity is endogenous and responds to the same policy distortions that create misallocation. In this framework, policy distortions not only misallocate re- sources across a given set of productive units (static effect), but also create disincentives for productivity improvement (dynamic effect) thereby affecting the productivity distribution and further contributing to lower aggregate output and productivity. The dynamic effect is substantial quantitatively. Reducing the dispersion in revenue productivity in the model by 25 percentage points to the level of the U.S. benchmark implies an increase in aggregate output and TFP by a factor of 2.9-fold. Improved resource allocation accounts for 42 percent of the gain, whereas the change in the productivity distribution accounts for the remaining 58 percent.