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The Aggregate and Complementary Impact of Micro Distortions

Raphael Bergoeing (), Norman Loayza () and Facundo Piguillem ()

No 1426, 2011 Meeting Papers from Society for Economic Dynamics

Abstract: We explore how regulatory or institutional distortions to resource reallocation limit the ability of developing countries to adopt new technologies. An efficient economy innovates quickly; but when the economy is unable to redeploy resources away from inefficient uses, technological adoption becomes sluggish, growth is reduced, and income lags further behind the leading economy. We use a firm dynamics model to analyze income gaps between the U.S. and several developing countries. For the median country, the model accounts for one-third of the income gap with respect to the U.S., with 60% of the simulated gap explained by firm renewal distortions taken individually and 40% by their interaction.

Date: 2011
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