Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. www.econstor.eu Terms of use: Documents in D I S C U S S I O N P A P E R S E R I E S ABSTRACT Cross-Country Differences in Productivity:The Role of Allocation and Selection * This paper combines different strands of the productivity literature to investigate the effect of idiosyncratic (firm-level) policy distortions on aggregate outcomes. On the one hand, a growing body of empirical research has been relating cross-country differences in key economic outcomes, such as productivity or output per capita, to differences in policies and institutions that shape the business environment. On the other hand, a branch of empirical research has attempted to shed light on the determinants of productivity at the firm-level and the evolution of the distribution of productivity across firms within each industry. In this paper, we exploit a rich source of data with harmonized statistics on firm level variation within industries for a number of countries. Our key empirical finding is that there is substantial variation in the within-industry covariance between size and productivity across countries, and this variation is affected by the presence of idiosyncratic distortions. We develop a model in which heterogeneous firms face adjustment frictions (overhead labor and quasi-fixed capital) and idiosyncratic distortions. We show that the model can be readily calibrated to match the observed cross-country patterns of the within-industry covariance between productivity and size and thus help to explain the observed differences in aggregate performance. NON-TECHNICAL SUMMARYThis paper sheds light on the role of policy-induced distortions in the allocation of resources for productivity growth. It exploits a rich source of data with harmonized statistics on firm level variation in productivity and size within each industry for a number of countries. It shows that the observed cross-country variation in the correlation between firms' size and their productivity, within-industry, can be explained by the presence of idiosyncratic distortions. The paper presents a theoretical model in which heterogeneous firms face adjustment frictions (overhead labor and quasi-fixed capital) and idiosyncratic distortions. The model can be readily calibrated to match the observed cross-country patterns of the within-industry covariance between productivity and size and thus help to explain the observed differences in aggregate performance.JEL Classification: E02, L11, L16, L2, L25, O4, O57

Liberalization and privatization have made the regulatory environment more market-friendly throughout the OECD. However using a large new dataset on product market regulation, we show that regulatory policies in OECD nations have become more dissimilar in relative terms, even as all nations have liberalized. This seemingly contradictory finding is explained by different starting points and different reform speeds. Our data also show that this divergence in the regulatory settings lines up with the divergent growth performance of OECD nations, in particular the poor performance of large Continental economies relative to that of the US. The data, which tracks various types of product market regulation in manufacturing and service industries for 18 OECD economies over the past two decades, allows us to explore this link in detail. We find that productivity growth is boosted by reforms that promote private corporate governance and competition (where these are viable). Moreover, our detailed findings suggest how product market regulation and productivity growth are linked. In manufacturing, the productivity gains from liberalization are greater the further a given country is from the technology leader. This indicates that entry-limiting regulation may hinder the adoption of existing technologies, possibly by reducing competitive pressures, technology spillovers, or the entry of new high-tech firms. These results offer an interpretation of poor Continental performance. Strict product market regulations - and lack of regulatory reforms - appear to underlie the meagre productivity performance of some European countries, especially in those industries where Europe has accumulated a technology gap (e.g. industries producing or using information and communication technologies). Copyright (c) CEPR, CES, MSH, 2003..

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