Quantifying the effects of economic distortions on firm-level productivity

This paper uses the World Bank Enterprise Survey (WBES) data, the only globally available firm-level database for developing countries on business environment and firm performance to identify and quantify the effects of economic distortions (and variables related to firm choices) on revenue total factor productivity (TFPR). Applying the methodology of De Loecker (2013) to estimate TFPR, which accounts for endogeneity of input choices and an endogenous productivity process, the paper sheds light on three policy issues. First, it identifies and quantifies the contribution of distortions (and other choice variables) on TFPR, thereby helping to establish priorities for the policy reform agenda to boost firm-level productivity in developing countries. Second, the paper provides additional evidence that the relative contribution of different distortions on TFPR varies across country groups (classified by income level) and firm groups (classified by size, age, and ownership). Third, the paper contributes to the academic and policy debate concerning the possibility of relying on TFPR dispersion to infer the presence of economic distortions when information on distortions is not observable. Based on the estimated partial effects of observed policy variables (and choice variables) on TFPR, the authors perform counterfactual exercises to explore TFPR dispersion changes when the effects of distortions (and other choice variables) are accounted for. The paper concludes that TFPR dispersion should not be used to infer the presence of economic distortions, as other factors not directly related to economic policies might also explain the dispersion pattern observed in the data.

Keywords: Total Factor Productivity, Policy Distortions, Misallocation