Abstract
Resource misallocation can lower the aggregate total factor productivity (TFP). We use micro-data on manufacturing establishments from the Instituto Ecuatoriano de Estadística y Censos to quantify the differences in productivity and diagnose the efficiency in the allocation of resources between formal and informal firms in the Ecuadorian in the manufacturing sector. We use the model proposed by Hsieh and Klenow (Q J Econ 124(4):1403–1448, 2009) to find informal firms have lower physical productivity than formal firms. We also found formal firms have a restricted growth due to capital and output distortions. These results indicate the existence of an inefficient allocation of resources between firms. By reallocating resources to equalize marginal productivity in the manufacturing sector, we calculate TFP gains of 80% in 2002 and 69% in 2015.
Highlights
Latin American countries have shown slow economic growth and low productivity in recent decades
6.3.2 Revenue productivity and informality Previously we found that there is a high dispersion of the revenue productivity (TFPR), which denotes an inefficient allocation of resources among firms
Following the heuristic interpretation of the TFPR differences presented above, the results indicate that a dollar of capital and labor allocated to formal firms is worth approximately 30% more than for completely informal firms, and 7% more than for semi-formal firms
Summary
Latin American countries have shown slow economic growth and low productivity in recent decades. Recent studies by Banerjee and Duflo (2005), Restuccia and Rogerson (2008) and Hsieh and Klenow (2009) argue that the slow growth of TFP may be a consequence of policies and market failures These determine the existence of the firms and the allocation of resources among them. Developing countries are characterized by large differences in productivity between formal and informal firms, which indicates the existence of inefficiencies in the allocation of resources (Busso et al 2013). We find informal firms have lower physical productivity than formal firms, and formal firms have a restricted growth due to the distortions they face These results indicate the existence of an inefficient allocation of resources among firms. By reallocating resources to equalize marginal productivity in the manufacturing sector, gains of 80% in 2002 and 69% in 2015 would be obtained
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