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.
Cross-Country Differences in Productivity: The Role of Allocation and SelectionEric Bartelsman, John Haltiwanger and Stefano Scarpetta ,
1( 103 )
American Economic Review