We use producer-level data to evaluate the role of financial frictions in determining total factor productivity (TFP). We study a model of establishment dynamics in which financial frictions reduce TFP through two channels. First, finance frictions distort entry and technology adoption decisions. Second, finance frictions generate dispersion in the returns to capital across existing producers and thus productivity losses from misallocation. Parameterizations of our model consistent with the data imply fairly small losses from misallocation, but potentially sizable losses from inefficiently low levels of entry and technology adoption. (JEL E32, E44, F41, G32, L60, O33, O47) Differences in GDP per capita across countries are large and mostly accounted for by differences in total factor productivity. A key challenge is to identify the sources of these large differences in TFP. Since financial markets are much less developed in poor countries, a hypothesis that has received much attention in recent years is that financial frictions are an important source of aggregate TFP losses. 1 Financial frictions can reduce aggregate productivity via two channels. First, they may distort entry and technology adoption decisions and thus reduce the productivity of individual producers. 2 Second, financial frictions may generate differences in the returns to capital across individual producers, and thus efficiency losses due to misallocation. 3 Our goal in this paper is to evaluate the strength of these two channels quantitatively, using establishment-level data for the manufacturing sectors of South Korea, a country with a relatively well-developed financial system, as well as China and Colombia, two countries with relatively low levels of financial development. ).We thank Vivian Yue for many useful conversations during an early stage of this project. We thank our discussants, Simon Gilchrist, Jan de Loecker, Ben Moll, Richard Rogerson, and Manuel Santos, and three anonymous referees, for valuable comments and suggestions. We have also benefited from conversations with

provided excellent research assistance. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

for their comments. Edmond thanks the Australian Research Council for financial support under grant DP-150101857. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

We study the gains from trade in a model with endogenously variable markups. We show that the pro-competitive gains from trade are large if the economy is characterized by (i) extensive misallocation, i.e., large inefficiencies associated with markups, and (ii) a weak pattern of cross-country comparative advantage in individual sectors. We find strong evidence for both of these ingredients using producer-level data for Taiwanese manufacturing establishments. Parameterizations of the model consistent with this data thus predict large pro-competitive gains from trade, much larger than those in standard Ricardian models. In stark contrast to standard Ricardian models, data on changes in trade volume are not sufficient for determining the gains from trade.

This paper examines the role of inventories in the decline of production, trade, and expenditures in the US in the economic crisis of late 2008 and 2009. Empirically, we show that international trade declined more drastically than trade-weighted production or absorption and there was a sizeable inventory adjustment. This is most clearly evident for autos, the industry with the largest drop in trade. However, relative to the magnitude of the US downturn, these movements in trade are quite typical. We develop a two-country general equilibrium model with endogenous inventory holdings in response to frictions in domestic and foreign transactions costs. With more severe frictions on international transactions, in a downturn, the calibrated model shows a larger decline in output and an even larger decline in international trade, relative to a more standard model without inventories. The magnitudes of production, trade, and inventory responses are quantitatively similar to those observed in the current and previous US recessions.