TY - JOUR AU - Collard-Wexler, Allan AU - Asker, John AU - De Loecker, Jan TI - Productivity Volatility and the Misallocation of Resources in Developing Economies JF - National Bureau of Economic Research Working Paper Series VL - No. 17175 PY - 2011 Y2 - June 2011 DO - 10.3386/w17175 UR - http://www.nber.org/papers/w17175 L1 - http://www.nber.org/papers/w17175.pdf N1 - Author contact info: Allan Collard-Wexler Department of Economics Duke University 233 Social Sciences Durham, NC 27708 E-Mail: allan.collard-wexler@duke.edu John Asker Department of Economics University of California, Los Angeles Bunche Hall 8363 405 Hilgard Avenue Los Angeles, CA 90095-1477 Tel: (310) 794 4892 E-Mail: johnasker@econ.ucla.edu Jan De Loecker Economics Department KU Leuven Naamsestraat 68 3000 Leuven Belgium E-Mail: jan.deloecker@kuleuven.be AB - We investigate the role of dynamic production inputs and their associated adjustment costs in shaping the dispersion of total factor productivity (TFP) and static measures of capital misallocation within a country. Using data on 5,010 establishments in 33 developing countries from the World Bank's Enterprise Research Data, we find that countries exhibiting greater time-series volatility of productivity are also characterized by greater cross-sectional dispersion in productivity. Volatility in TFP explains one quarter to one third of cross-country productivity dispersion. We document a similar relationship between productivity volatility and the dispersion of the marginal revenue product of capital (static capital misallocation). We then use a standard model of investment with adjustment costs, parameterized using numbers calibrated to U.S. data, to show that increasing the volatility of productivity to the level observed in these developing economies can quantitatively replicate the observed relationship between static misallocation and volatility observed in the data. We find that sixty-one percent of the static capital misallocation in the data is captured by the model's prediction. Our findings suggest that the dynamic process governing productivity shocks is a first-order determinant of differences in misallocation and, hence, income across countries. ER -