Aggregate Total Factor Productivity Research Articles

Financial Frictions, Capital Misallocation, and Input-Output Linkages

I study how input-output linkages amplify the aggregate impact of sectoral financial distortions in a dynamic general equilibrium model with endogenous capital wedges. The aggregate impact of a shock can be decomposed into weighted productivity changes and changes in allocative efficiency. A systematic uncertainty shock induces heterogenous responses in sectoral capital wedges, reducing allocative efficiency and aggregate total factor productivity (TFP). However, idiosyncratic sectoral uncertainty shocks may improve allocative efficiency and raise TFP. I then calibrate the model to US data. The network amplification magnitude on aggregate TFP ranges from 1.58 to 1.7. (JEL E22, E23, E25, E32, E44, G20, G30)

Structural change, labour reallocation, and productivity growth in post-reform China

Abstract Why has the structural bonus been so small during China’s post-reform era? This article explains the puzzle by exploiting the heterogeneity in structural-change patterns across Chinese provinces. Using an original database covering production and factor inputs in 8 sectors and 31 provinces over 1993–2016, I show only those provinces where labour was reallocated from agriculture to manufacturing and services benefited from a structural bonus on labour productivity growth. In the other provinces, this structural-change effect was minimal or negative. Regarding the structural-change effect on total factor productivity (TFP) growth, I find both labour and capital reallocation played a limited role. Labour reallocation has little potential in boosting aggregate TFP growth, as marginal labour returns are similar across sectors. Capital reallocation has a far greater potential but remains restrained, suggesting substantial reallocation frictions. China’s TFP growth is mostly explained by within-sector technological progress, which has been dissipating since 2008, leading to declining TFP growth.

The gains from changes in internal trade costs: A quantitative analysis of China

AbstractWe study how internal trade costs affect the Chinese economy. Combining regional and industry data with a multiregional multisector general equilibrium model, we quantify the magnitude of total trade costs and institutional trade costs, and the impact of their changes on aggregate, regional, and sectoral total factor productivity, gross domestic product, and welfare. Using unique data, we estimate the sectoral trade elasticity of internal trade in 16 tradable sectors. We use our calibrated model to perform a variety of counterfactual exercises. We find that the welfare gains are negative for a 5% reduction in total trade costs and for the elimination of institutional trade costs, which can be attributed to inherent inefficiencies in the economy. However, as total trade costs decrease further, the positive welfare effect significantly exceeds the impact of inefficiency. The regional and sectoral effects of changes in trade costs show that the spatial structure of the economy, input‐output linkages, and local factors together determine the heterogeneity of sectoral and regional consequences. Finally, we infer the relative changes in China's internal trade costs from 2012 to 2017, and calculate their economic effects.

Information infrastructure construction and optimization of resources allocation among firms: Evidence from “Broadband China” strategy

The construction of information infrastructure stands at the forefront of current digital strategies aimed at fostering high-quality economic growth. However, misallocation of resources severely constrains the sustainable economic growth of developing countries. Using the firm-level data from the National Tax Survey database over the time period 2009 to 2016, this paper examines the impact of information infrastructure on the misallocation of resources among firms by utilizing the city-level “Broadband China” strategy as a quasi-natural experiment. We find that information infrastructure construction can significantly mitigate resource misallocation among firms by reducing information costs and breaking down market barriers, and that plays a crucial role in improving China's aggregate total factor productivity (hereafter, TFP). Furthermore, this mitigating effect of information infrastructure on misallocation is more significant in cities with higher economic development and administrative hierarchy, and it can alleviate the resource misallocation caused by scale discrimination. These findings enrich the research on information infrastructure construction and resource allocation efficiency and also offer valuable insights for developing countries seeking practical guidance.

Import License, Misallocation, and Aggregate Total Factor Productivity in the Chinese Steel Industry*

This paper examines how import license restriction‐induced resource misallocation affects industry aggregate total factor productivity (TFP). We apply a recently proposed consistent estimator to micro‐level data from the Chinese steel industry, considering material price heterogeneity. We back out the potential extent of misallocation, finding the importers' TFP is not significantly higher than that of the nonimporters, and resource misallocation caused by the iron‐ore import license lowers aggregate productivity. Our analysis indicates that removing the trade barrier counterfactually would increase the industrial TFP by 76.8%, on average.

Allocative Efficiency between and within the Formal and Informal Manufacturing Sectors in Zimbabwe

Abstract Resource misallocation has the potential to reduce aggregate total factor productivity and undermine industrial development. Aggregate productivity losses are found to be particularly pronounced in emerging economies where large market frictions impede efficient resource allocation. Available estimates, however, almost entirely exclude firms in the informal sector that in some countries, such as Zimbabwe, make up a high share of overall production and employment. The exclusion of informal firms can result in either an over- or under-estimate of the aggregate productivity losses from misallocation. This paper, therefore, uses firm-level survey data to analyze how market distortions contribute to the misallocation of resources within and between the formal and informal manufacturing sectors in Zimbabwe. Applying the approach developed by Hsieh and Klenow (2009) to firm-level microdata, the results reveal extensive resource misallocation in both the formal and informal manufacturing sector. Market shares of informal firms are found to be low relative to their productivity—an outcome associated with relatively large capital market distortions. Misallocation is also more pronounced among relatively productive firms, thus exacerbating aggregate losses in total factor productivity (TFP). Estimates indicate that aggregated gains in TFP of 151.4 percent can be realized through efficient resource allocation.

The role of services in India's post-reform economic growth

The services have been the driver of India's overall growth since the onset of economic reforms in the 1990s. The value-added share of services increased from 41 percent in 1990 to 53 percent in 2018. On average, the sector grew at 7.5 percent annually during 1993–2018, contributing to about half of the aggregate economic growth. Using the India KLEMS data, we examine the trends in total factor productivity (TFP) in individual industries within services and their contribution to aggregate TFP growth in the sector during 1993–2018. We find that transport and storage was the highest contributor among various market services industries followed by financial services, while public administration made a relatively high contribution to aggregate non-market services TFP growth. Moreover, we investigate the factors driving TFP growth in the services sector, particularly the role of manufacturing TFP – looking into spillover effect from manufacturing to market services and non-market services. Our results suggest that TFP growth in manufacturing had a significant positive impact on TFP growth in the services sector. Also, we find evidence of significant productivity spillover effect to India's services sector from other countries, particularly the developed countries.

Does equity market openness increase productivity? the dual effects of Shanghai-Hong Kong stock Connect program in China

This study investigates the dual effects of equity market openness on aggregate total factor productivity (TFP) growth and finds that gains in aggregate TFP can be driven by within-firm and reallocation effects across firms. Using a quasi-natural experiment based on China’s Shanghai-Hong Kong Stock Connect program, we find that equity market openness has a positive effect on firms’ TFP. Stock price efficiency is the mechanism underlying this improvement. Equity market openness reduces firms’ stock mispricing and improves corporate governance and investment efficiency through the feedback effect, thereby increasing TFP. Finally, we argue that equity market openness induces significant growth in capital stock and employment among high-TFP firms, driving them to achieve rapid growth and greater market share. The reallocation effect of equity market openness translates into aggregate productivity gains. This empirical study considers stock pricing as a mechanism to shed light on the dual effect of equity market openness on TFP growth.

Farmland Leasing, misallocation Reduction, and agricultural total factor Productivity: Insights from rice production in China

Reducing factor misallocation is crucial for enhancing agricultural aggregate total factor productivity (TFP) and narrowing the income gap between urban and rural areas in China. This paper presents a theoretical framework illustrating how farmland leasing affects aggregated TFP via the reduction of misallocation. Utilizing a comprehensive dataset of cost and benefit survey for Jiangsu rice farmers, monthly surface climatological data, and soil characteristic information from FAO, this study finds that efficient factor reallocation could theoretically result in a 23.6% increase in aggregate TFP. In practice, a 1% increase in farmland leasing leads to a 1.087% gain in aggregate TFP and a 0.267% reduction in misallocation using IV regression. These effects become larger after the Three Rights Separation (TRS) reform compared to prior conditions. The mediation effects of farmland leasing on TFP through misallocation reduction are only observed in Southern Jiangsu, possibly due to farmland concentration.

Can land misallocation be a greater barrier to development than capital? Evidence from manufacturing firms in Sri Lanka

We quantify cross-firm misallocation in land and compare it with that in capital. Misallocation arises when a production factor produces greater marginal revenue product (MRP) in some firms than in others because the former firms have to pay a higher shadow production factor price which is usually distorted by persistent institutional factors. Consequently, the aggregate total factor productivity (TFP) could be increased through cross-firm factor reallocation within an industry. Existing literature mainly emphasizes the misallocation in capital and labour, or in agricultural land. Little is done to quantify the misallocation of industrial land. By using annual-firm-level survey data from Sri Lanka's manufacturing sector over 1994–2015, we find that the aggregate TFP gain from reallocating land is about five times of that from capital. Further, we find that firms can hardly grow bigger due to size-dependent land distortion. The results suggest that land distortion can be a crucial barrier to development.

Policy distortions and aggregate productivity with endogenous establishment-level productivity

What accounts for income per capita and total factor productivity (TFP) differences across countries? We study resource misallocation across heterogeneous production units in a general equilibrium model where establishment productivity and size are affected by policy distortions. We solve the model in closed form and show that policy distortions have a substantial negative effect on establishment productivity growth, average establishment size, and aggregate productivity. Calibrating a distorted benchmark economy to U.S. data, we find that empirically reasonable variations in distortions generate reductions in aggregate TFP of more than 24 percent while slightly increasing concentration in the establishment size distribution. If distortions in addition lower the exit rate of incumbent establishments, as supported by some empirical evidence, the aggregate TFP loss doubles to 48 percent.

The Impact of COVID-19 on Productivity

Abstract We analyse the impact of Covid-19 on productivity using data from an innovative monthly firm survey that asks for quantitative impacts of Covid-19 on inputs and outputs. We find total factor productivity (TFP) fell by up to 6% during 2020-21. The overall impact combined large reductions in ‘within-firm’ productivity, with offsetting positive ‘between-firm’ effects as less productive sectors, and less productive firms within them, contracted. Despite these large pandemic effects, firms' post-Covid forecasts imply surprisingly little lasting impact on aggregate TFP. We also see significant heterogeneity over firms and sectors, with the greatest impacts in those requiring extensive in-person activity.

The granular nature of emerging market economies: The case of Kazakhstan

AbstractThis paper analyzes the granularity hypothesis in a large emerging economy, Kazakhstan. We use a new longitudinal dataset at the firm level and at quarterly frequency between 2012 and 2018 to document the size distribution of firms and to provide evidence that it follows a power law. We find that the largest 30 firms explain nearly 80 percent of the growth in aggregate total factor productivity. This confirms earlier research for the U.S. and other developed countries. However, the granular nature of the Kazakh economy is even more outspoken than in other countries. Thus idiosyncratic shocks and the way they ripple through the production network matter to understand changes in aggregate productivity growth. Moreover, since these granular firms are concentrated in the oil industry it exposes the vulnerability of the economy more to unexpected shocks in one industry in particular.

Are export tax rebates patronage for Chinese firms? An analysis of productivity

This paper examines the nexus between export tax rebates and productivity using Chinese firm-level data from 2000 to 2007. The empirical findings indicate that a one percentage point decrease in export tax rebate rates increases the total factor productivity (TFP) of a firm by about 0.1 percentage points. We explore the possible mechanisms that explain this nexus and attribute it to the allocation effect of export tax rebate policy; that is, export tax rebates prevent low-productivity firms from exiting the market and further reallocate resources and economic activities to them. In addition, a decrease in rebate rates significantly encourages the TFP growth of surviving firms and leads to an increase in aggregate TFP. Specifically, throughout 2000–07, the declining rebate rates accounted for 5.23% of the rise in the aggregate TFP, and the between-firm effect was 3.85%, which is much larger than the within effect.

Size-dependent financial frictions, capital misallocation, and aggregate productivity

Abstract This paper quantitatively examines the macroeconomic effects of size-dependent financial frictions on capital misallocation and aggregate total factor productivity. Based on panel data from China’s manufacturing sector, I find that among non-state-owned enterprises, (i) the dispersion of the marginal product of capital is large and persistent and (ii) large firms tend to have higher leverage, and lower mean and dispersion of the marginal product of capital than their small counterparts. This paper analyzes a dynamic stochastic general equilibrium model with heterogeneous agents and size-dependent financial frictions. By calibrating the model to a Chinese firm-level dataset, I show that in addition to matching the aforementioned stylized facts, the economy with a size-dependent borrowing constraint is able to reproduce the observed negative correlation between firm size and the marginal product of capital, as well as generate quantitatively modest TFP loss. Furthermore, ignoring firms’ size-dependent financing patterns may lead to an overstatement of TFP loss due to financial frictions.

Heterogeneity Effect of Corporate Financialization on Total Factor Productivity

As corporate financialization becomes an important stylized fact, policymakers and economists are concerned that corporate financialization may harm firms’ productivity by reducing operation investment. However, no previous literature has assessed the heterogeneous effect of corporate financialization on total factor productivity induced by self-selection. In this study, we do so by leveraging the framework of marginal treatment effects (MTE) using samples of Chinese listed non-financial companies during the period from 2007 to 2018. We find that firms with high resistance to financialization can result in gains in productivity by choosing financialization. In contrast, firms with low resistance to financialization have a significant reduction in total factor productivity (TFP) when choosing financialization. Meanwhile, based on our counterfactual analysis, a stable fluctuation of housing growth is shown to have a significant impact on total factor productivity improvement, and the evidence is supportive of the TFP loss being mitigated by a stable housing market. Moreover, the mechanism analysis confirms a strong negative impact of financialization on innovation, which is the potential channel to depress aggregate total factor productivity. The detected heterogeneity effect highlights the importance of housing price in the self-selection of financialization choices to affect the TFP. Policymakers may wish to focus on corporate financialization, which is accompanied by inhibition in TFP growth, keeping the housing market stable in order to minimize the side effects of financialization on productivity.

Does Environmental Regulation Help Mitigate Factor Misallocation?-Theoretical Simulations Based on a Dynamic General Equilibrium Model and the Perspective of TFP.

How environmental regulation affects factor allocation is becoming an emerging hot topic in academia. In this paper, we construct a dynamic general equilibrium model accommodating environmental regulatory shock based on the H-K framework to explain the impact of environmental regulation on factor misallocation from the perspective of aggregate total factor productivity loss changes, and numerical simulation results are provided for several representative scenarios. The results show that environmental regulation has a significant effect on factor market misallocation, but this effect is not simply positive or negative, and it mainly depends on the firms’ initial factor allocation status and the intensity of the shock. Reducing the intensity of environmental regulation for firms that face stronger distortion helps mitigate factor misallocation and, on the contrary, the same policy could exacerbate factor market misallocation. Under the environmental regulatory shock condition, firms’ overhead labor input has a moderating effect on the factor allocation mitigation of environmental regulation. Distorted firms’ higher overhead labor share inhibits the correction of factor misallocation by environmental regulation. And reducing firms’ overhead labor share amplifies the correcting effect of environmental regulation on factor misallocation.

The dynamic demand for capital and labor: Evidence from Chinese industrial firms

This paper employs a structural econometric approach to study the joint dynamic demand for capital and labor in Chinese firms. We recover key structural parameters in a dynamic model of interrelated factor demand subject to joint convex and non-convex costs. The model is able to replicate the stylized facts directly observed from Chinese manufacturing firm-level data over the period 1998–2007. Our estimations reveal that firms exhibit significant convex and fixed costs when adjusting capital or employment stock. Moreover, the adjustments in two factor inputs are inter-related, and adjusting capital and labor simultaneously is more costly than adjusting two inputs sequentially. Our counterfactual analysis suggests that removing the frictions in both capital and labor adjustments will lead to a 1% increase in aggregate total factor productivity (TFP) and a 7% increase in aggregate output.

High-technology zones, misallocation of resources among cities and aggregate productivity: evidence from China

ABSTRACT Recent literature has been debating the performance of high-technology zones (HTZs) in developing countries. This paper contributes to this debate by examining how national HTZs in China affect allocative efficiency of resources among Chinese cities as well as China’s total factor productivity (TFP) growth. This paper finds that resource misallocation among cities reduces China’s TFP growth by 4.5% of which capital misallocation accounts for 2.4% and labour misallocation accounts for 2.1%. Moreover, we find that the establishment of national HTZs in China increases aggregate TFP by improving the allocative efficiency of capital among cities: that is, redistributing more capital from lower to higher productivity cities. In contrast, we find little evidence of TFP gain driven by technical efficiency following the establishment of HTZs. This paper thus reveals a potential positive effect of establishing HTZs in developing countries: although establishing HTZs may not improve the technical efficiency of these countries, it may nevertheless mitigate these countries’ resource misallocation and enhance their aggregate TFP.

The impact of fiscal policy on total factor productivity growth in a developing economy: evidence from Botswana

Most empirical work on the nexus between fiscal policy and total factor productivity (TFP) is focussed on aggregate analysis and lack sector-specific evidence required to guide effective policy decisions. Our study addresses this gap by analysing the impact of fiscal policy on sectoral TFP growth in Botswana between 1984 and 2016 using the Autoregressive Distributive Lag method. The results suggest that focussing on aggregate TFP growth masks specific issues which are peculiar to various economic sectors. For instance, mineral tax, other tax revenue, and expenditure on social services were found to have a significant long-run positive impact on the TFP growth in the primary sector only, while a negative impact is witnessed in the secondary and tertiary sectors. SACU revenue has a positive impact on TFP growth in both the primary and tertiary sectors, while productive spending boosts TFP growth across all sectors. In addition, both the value-added tax and the non-mining income tax have a negative impact on TFP growth across all sectors. The speed of adjustment was found to be high in the primary sector compared to other sectors. The findings single out the importance of taking into account sector-specific fiscal policies in influencing sectoral TFP growth.