Aggregate productivity and the allocation of resources over the business cycle

Sophie Osotimehin

Review of Economic Dynamics, 2019, vol. 32, 180-205

Abstract: This paper proposes a novel decomposition of aggregate productivity to evaluate the role of allocative efficiency for the cyclical dynamics of aggregate productivity. The decomposition, which is derived from the aggregation of heterogeneous firm-level production functions, accounts for changes in allocative efficiency, as well as for changes in entry and exit. This approach thereby extends Solow's (1957) growth accounting exercise to a framework with firm heterogeneity and frictions in the allocation of resources across firms. I apply the decomposition to a comprehensive dataset of French manufacturing and service firms, and I find that entry and exit contribute little to the year-on-year variability of sectoral productivity, between-sector allocative efficiency plays a limited role for the volatility of aggregate productivity, whereas within-sector allocative efficiency is countercyclical and tends to reduce the volatility of sectoral productivity. (Copyright: Elsevier)

Keywords: Aggregate productivity; Allocative efficiency; Business cycle; Resource allocation; entry and exit; Cleansing (search for similar items in EconPapers)
JEL-codes: D24 E32 O47 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (17)

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DOI: 10.1016/j.red.2019.02.003

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