Misallocation and Aggregate TFP in Chile and Norway

Abstract

The aim of this paper is to perform analysis on to what extent resources are distorted and how policies relate to aggregate efficiency in Chile and Norway. We build the model that monopolistic competitive firms face distortions on output and capital. Distortions differentiate marginal revenue product across firms and therefore decrease aggregate TFP.

This paper compares detrended aggregate TFP between Chile and Norway. The high TFP gain from removing distortions in Chile indicates that labor and capital inputs are more distorted in Chile than in Norway. Additionally, the moment of firm size distribution shows that both distorted and efficient size distribution are more dispersed in Chile. The variance decomposition presents that in Norway the components of efficiency gain are fairly stable. In contrast, the variance of output distortion in Chile is the main component explaining the decreasing efficiency gain, and the between-group component of output wedges at both end of the productivity distribution mainly explains the change in its variance.