Icarus and Daedalus: Non-Gaussian Micro Shocks and Aggregate Productivity Risk

Ronit Mukherji () and Alejandro Rojas-Bernal ()
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Ronit Mukherji: Ashoka University
Alejandro Rojas-Bernal: University of Hawaii

No 202604, Working Papers from University of Hawaii at Manoa, Department of Economics

Abstract: How does productivity evolve at the microeconomic level, and how does that evolution shape aggregate risk? Using restricted-use plant--product data from India's Annual Survey of Industries (2010-11 to 2022-23), we construct annual physical-output Solow-residual growth accounting for markups, inventories, and heterogeneous input costs. Productivity growth is sharply peaked and fat-tailed, with nonlinear mean reversion that varies with producer size. Larger producers recover more strongly after adverse shocks and retain more of their favorable gains-the Daedalian level effect-yet their shocks extend farther into both tails conditional on entry. Smaller producers exhibit sharper reversals after large favorable shocks-Icarian fallout. We capture these patterns with a three-regime Markov normal mixture conditioned on productivity history and size. Our law of motion yields the distribution of aggregate technology growth. Relative to a size-dependent Gaussian distribution, our regime model has lower aggregate dispersion but substantially thicker standardized tails and raises the probability of an aggregate technology contraction from 0.05% to 0.31%. Removing size dependence while retaining three regimes instead lowers expected growth and raises contraction probability to 2.47%. These separately estimated alternatives show that nonnormality and size dependence have distinct implications for aggregate risk. Granularity is distributional: aggregation weights determine whose shocks matter; productivity dynamics determine the risks they carry.

Keywords: Firm productivity dynamics; aggregate productivity risk; non-Gaussian productivity shocks; production networks; granular fluctuations; firm-size heterogeneity; physical-output productivity (search for similar items in EconPapers)
JEL-codes: C46 D22 D24 D57 E23 E32 L11 L25 O47 (search for similar items in EconPapers)
Date: 2026-09
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