Economists have long puzzled over the astounding differences in productivity between firms and countries. For example, looking at disaggregated data on U.S. manufacturing industries, Syverson (2004a) found that plants at the 90th percentile produced four times as much as the plant in the 10th percentile on a per-employee basis. Only half of this difference in labor productivity could be accounted for by differential inputs, such as capital intensity. Syverson looked at industries defined at the four-digit level in the Standard Industrial Classification (SIC) system (now the North American Industry Classification System or NAICS) like “Bakeries and Tortilla Manufacturing ” or “Plastics Product Manufacturing. ” Foster, Haltiwanger, and Syverson (2008) show large differences in total factor productivity even within very homogeneous goods industries such as boxes and block ice. Some of these productivity differences across firms and plants are temporary, but in large part they persist over time. At the country level, Hall and Jones (1999) and Jones and Romer (2009) show how the stark differences in productivity across countries account for a substantial fraction of the differences in average per capita income. Both at the plant level and at the national level, differences in productivity are typically calculated as a residual—that is, productivity is

Does capital misallocation from financial frictions cause substantial aggregate productivity losses? To explore this question, I propose a highly tractable theory featuring entrepreneurs who are subject to borrowing constraints and idiosyncratic productivity shocks. Productive entrepreneurs cannot raise capital in the market; however, they may self-finance investment in the sense of paying it out of their own savings. Such selffinancing can undo capital misallocation if productivity shocks are sufficiently autocorrelated. If so, financial frictions have no effect on aggregate productivity. Conversely, productivity losses may be large if autocorrelation is low. My model economy is further isomorphic to an aggregate growth model with the difference that productivity is endogenous and depends on the quality of credit markets. This implies that financial frictions have no direct effect on aggregate output and savings; only an indirect one through aggregate productivity. In an application of the model, I estimate its critical parameters using plant-level panel data from two emerging market economies, show that it can match the allocation of capital within these economies, and calculate that financial frictions can explain aggregate productivity losses of up to twenty-five percent relative to the US.

We study a model of establishment dynamics in which entrepreneurs face a financing constraint. We ask: does the model, when parameterized to match salient features of plant-level data, predict large aggregate TFP losses from misallocation? Our answer is: No. We estimate financing frictions that are fairly large: in our economy half of the establishments face binding borrowing constraints and an implicit external finance premium of 55 % on average. Efficient establishments are, nonetheless, able to quickly accumulate internal funds and grow out of their borrowing constraint. Parameterizations of the model under which this process of internal accumulation is hindered can, in principle, cause very large TFP losses. Such parameterizations are, however, at odds with important features of plant-level data: the variability and persistence of plant-level output, as well as differences in the return to capital and output growth rates across young and old plants.

Per capita income in the richest countries of the world exceeds that in the poorest countries by more than a factor of 50. What explains these enormous differences? This paper returns to two old ideas in development economics and proposes that complementarity and linkages are at the heart of the explanation. First, just as a chain is only as strong as its weakest link, problems at any point in a production chain can reduce output substantially if inputs enter production in a complementary fashion. Second, linkages between firms through intermediate goods deliver a multiplier similar to the one associated with capital accumulation in a neoclassical growth model. Because the intermediate goods ’ share of revenue is about 1/2, this multiplier is substantial. The paper builds a model with complementary inputs and links across sectors and shows that it can easily generate 50-fold aggregate income differences.

Abstract Why does capital flow out of countries with fast-growing productivity? In this paper, we provide a quantitative framework incorporating heterogeneous production units and underdeveloped domestic financial markets to study the joint dynamics of total factor productivity (TFP) and capital flows. When an unexpected once-and-for-all reform eliminates non-financial idiosyncratic distortions and liberalizes capital accounts, the TFP of our model economy rises gradually and capital flows out of it. The rise in TFP reflects efficient reallocation of capital and talent, a gradual process drawn out by domestic financial market frictions. The concurrent capital outflows are driven by the positive response of domestic saving to higher returns and by the sluggish response of domestic investment to higher TFP-the latter being another ramification of domestic financial frictions. We use our model to analyze the welfare consequences of opening up capital accounts. We find that the marginal welfare impact of capital account liberalization is negative for workers while it is positive for entrepreneurs and wealthy individuals.

Abstract We analyze employment and capital adjustments using plant data from the Colombian Annual Manufacturing Survey. We estimate adjustment functions for capital and labor as a non-linear function of the gaps between desired and actual factor levels, allowing for interdependence in adjustments of the two factors. In addition to non-linear employment and capital adjustments in response to market fundamentals, we find that capital shortages reduce hiring and labor surpluses reduce capital shedding. We also find that after factor market deregulation in Colombia in 1991, factor adjustment hazards increased on the job destruction and capital formation margins. Finally, we find that completely eliminating frictions in factor adjustment would yield a substantial increase in aggregate productivity through improved allocative efficiency. Yet, the actual impact of the Colombian deregulation on aggregate productivity through factor adjustment was modest.

Recent theoretical work predicts that an important margin of adjustment to deregulation or trade reforms is the reallocation of output within firms through changes in their product mix. Empirical work has accordingly shifted its focus towards multi-product firms and their product mix decisions. Existing studies have however focused exclusively on the U.S. Using detailed firm-level data from India, we provide the first evidence on the patterns of multi-product firm production in a large developing country during a period (1989-2003) that spans large-scale trade and other market reforms. We find that in the cross-section, multi-product firms in India look remarkably similar to their U.S. counterparts, confirming the predictions of recent theoretical models. The time-series patterns however exhibit important differences. In contrast to evidence from the U.S., product churning – particularly product rationalization – is far less common in India. We thus find little evidence of “creative destruction”. We also find no link between declines in tariffs on final goods induced by Indian's 1991 trade reform and product dropping. The lack of product dropping is consistent with the role of industrial regulation in India, which, like in many other developing countries, may prevent an efficient allocation of resources.

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.

In this chapter we examine the relationship between Human Resource Management (HRM) and productivity. HRM includes incentive pay (individual and group) as well as many nonpay aspects of the employment relationship such as matching (hiring and firing) and work organization (e.g. teams, autonomy). We place HRM more generally within the literature on management practices and productivity. We start with some facts on levels and trends of both HRM and productivity and the main economic theories of HRM. We look at some of the determinants of HRM – risk, competition, ownership and regulation. The largest section analyses the impact of HRM on productivity emphasizing issues of methodology, data and results (from micro-econometric studies). We conclude briefly with suggestions of avenues for future frontier work.

We investigate, using firm level data for 79 developed and developing countries, whether differences in the allocation of resources across heterogeneous plants are a significant determinant of cross-country differences in income per worker. For this purpose, we use a standard version of the neoclassical growth model augmented to incorporate monopolistic competition among heterogeneous firms. For our preferred calibration, the model explains 58 % of the log variance of income per worker. This figure should be compared to the 42 % success rate of the usual model. JEL classification: O1.