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Policy Distortions and Aggregate Productivity: The Role of Idiosyncratic Shocks

Author

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  • Da Rocha Jose Maria

    (Universitat Autonoma de Barcelona and RGEA—Universidade de Vigo)

  • Pujolas Pau Salvador

    (I.D.E.A. and Universitat Autonoma de Barcelona)

Abstract

We consider policy distortions in a model where plants face idiosyncratic productivity shocks that evolve following a Brownian motion. Introducing idiosyncratic shocks into the model implies that plants have non-constant operating profits and as a result there is an endogenous exit margin and incumbent plants must decide in each period whether or not to remain in the industry. By using the forward Kolmogorov equation, we analytically characterize the Stationary Equilibrium. Our main contribution is to show that if a model is being calibrated/estimated without idiosyncratic shocks, where plants face constant productivity over time and the exit rate is exogenous to fit data generated from a model with shocks and endogenous entry, TFP distortions will be overestimated.

Suggested Citation

  • Da Rocha Jose Maria & Pujolas Pau Salvador, 2011. "Policy Distortions and Aggregate Productivity: The Role of Idiosyncratic Shocks," The B.E. Journal of Macroeconomics, De Gruyter, vol. 11(1), pages 1-36, November.
    • Handle: RePEc:bpj:bejmac:v:11:y:2011:i:1:n:35
    DOI: 10.2202/1935-1690.2297
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    References listed on IDEAS

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    1. Hugo A. Hopenhayn, 2011. "Firm Microstructure and Aggregate Productivity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 111-145, August.
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    3. John Asker & Allan Collard-Wexler & Jan De Loecker, 2011. "Productivity volatility and the misallocation of resources in developing economies," Working Papers of Department of Economics, Leuven 507295, KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven.
    4. Diego Restuccia & Richard Rogerson, 2008. "Policy Distortions and Aggregate Productivity with Heterogeneous Plants," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(4), pages 707-720, October.
    5. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
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    7. Pablo Andrés Neumeyer & Guido Sandleris, 2010. "Understanding Productivity During the Argentine Crisis," Business School Working Papers 2010-04, Universidad Torcuato Di Tella.
    8. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-1150, September.
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    Cited by:

    1. José-María Da-Rocha & Jaume Sempere, 2017. "ITQs, Firm Dynamics and Wealth Distribution: Does Full Tradability Increase Inequality?," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 68(2), pages 249-273, October.
    2. Da-Rocha, José-María & Restuccia, Diego & Tavares, Marina M., 2023. "Policy distortions and aggregate productivity with endogenous establishment-level productivity," European Economic Review, Elsevier, vol. 155(C).
    3. HOSONO Kaoru & TAKIZAWA Miho & YAMANOUCHI Kenta, 2017. "Competition, Uncertainty, and Misallocation," Discussion papers 17071, Research Institute of Economy, Trade and Industry (RIETI).

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