Potential Growth, Misallocation, and Institutional Obstacles: Firm-Level Evidence

Miguel Leon-Ledesma

No 480, ADB Economics Working Paper Series from Asian Development Bank

Abstract: One of the key determinants of potential growth are productivity gains. Total factor productivity (TFP)differences are the main determinant of per capita income differences between countries. A key factor to understand TFP is misallocation: the aggregate productivity loss from microeconomic distortions that prevent factors of production from being allocated to their optimal use. If misallocation is a key determinant of TFP differences, then reallocation of factors of production is a key driver of productivity gains. Since distortions preventing misallocation can be driven by institutional obstacles, then policies focused on the removal of these obstacles will affect potential growth. In this paper, we use a firm-level database for 62 developing countries to analyze which are the most important institutional obstacles driving misallocation. Our results highlight the importance of trade regulations, the functioning of courts, and access to finance as key determinants of misallocation within countries. Political instability, labor regulations, and access to infrastructure, appear as relevant obstacles explaining misallocation between countries.

Keywords: firm level; misallocation; potential growth; productivity (search for similar items in EconPapers)
JEL-codes: O40 O43 O47 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2016-04-08
New Economics Papers: this item is included in nep-eff and nep-tid
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