Publication: Entry and Exit, Multi-Product Firms, and Allocative Distortions
Loading...
Published
2017-04
ISSN
Date
2017-04-13
Author(s)
Editor(s)
Abstract
This paper proposes a multi-product model of firm dynamics to understand the implications of allocative distortions for the decisions of firms to enter, exit, and supply products to the market. These margins of adjustment have been largely neglected in the literature yet have direct contributions to welfare and productivity. The paper finds that when the analysis accounts for these channels, the traditional focus on long-run gains in Total Factor Productivity from reversing misallocation strongly underestimates the welfare gains that accrue when accounting for transitional dynamics. Calibrating the distortions to China in 1998, the analysis finds a welfare gain of 32 percent and a steady-state gain of 10 percent.
Link to Data Set
Citation
“Fattal Jaef, Roberto N.. 2017. Entry and Exit, Multi-Product Firms, and Allocative Distortions. Policy Research Working Paper;No. 8023. © World Bank. http://hdl.handle.net/10986/26369 License: CC BY 3.0 IGO.”
Digital Object Identifier
Associated URLs
Associated content
Other publications in this report series
Publication The Economic Value of Weather Forecasts: A Quantitative Systematic Literature Review(Washington, DC: World Bank, 2025-09-10)This study systematically reviews the literature that quantifies the economic benefits of weather observations and forecasts in four weather-dependent economic sectors: agriculture, energy, transport, and disaster-risk management. The review covers 175 peer-reviewed journal articles and 15 policy reports. Findings show that the literature is concentrated in high-income countries and most studies use theoretical models, followed by observational and then experimental research designs. Forecast horizons studied, meteorological variables and services, and monetization techniques vary markedly by sector. Estimated benefits even within specific subsectors span several orders of magnitude and broad uncertainty ranges. An econometric meta-analysis suggests that theoretical studies and studies in richer countries tend to report significantly larger values. Barriers that hinder value realization are identified on both the provider and user sides, with inadequate relevance, weak dissemination, and limited ability to act recurring across sectors. Policy reports rely heavily on back-of-the-envelope or recursive benefit-transfer estimates, rather than on the methods and results of the peer-reviewed literature, revealing a science-to-policy gap. These findings suggest substantial socioeconomic potential of hydrometeorological services around the world, but also knowledge gaps that require more valuation studies focusing on low- and middle-income countries, addressing provider- and user-side barriers and employing rigorous empirical valuation methods to complement and validate theoretical models.Publication The Macroeconomic Implications of Climate Change Impacts and Adaptation Options(Washington, DC: World Bank, 2025-05-29)Estimating the macroeconomic implications of climate change impacts and adaptation options is a topic of intense research. This paper presents a framework in the World Bank's macrostructural model to assess climate-related damages. This approach has been used in many Country Climate and Development Reports, a World Bank diagnostic that identifies priorities to ensure continued development in spite of climate change and climate policy objectives. The methodology captures a set of impact channels through which climate change affects the economy by (1) connecting a set of biophysical models to the macroeconomic model and (2) exploring a set of development and climate scenarios. The paper summarizes the results for five countries, highlighting the sources and magnitudes of their vulnerability --- with estimated gross domestic product losses in 2050 exceeding 10 percent of gross domestic product in some countries and scenarios, although only a small set of impact channels is included. The paper also presents estimates of the macroeconomic gains from sector-level adaptation interventions, considering their upfront costs and avoided climate impacts and finding significant net gross domestic product gains from adaptation opportunities identified in the Country Climate and Development Reports. Finally, the paper discusses the limits of current modeling approaches, and their complementarity with empirical approaches based on historical data series. The integrated modeling approach proposed in this paper can inform policymakers as they make proactive decisions on climate change adaptation and resilience.Publication Rigging the Scores: Corruption through Scoring Rule Manipulation in Public Procurement Auctions(Washington, DC: World Bank, 2025-12-02)Public procurement is highly susceptible to corruption, especially in developing countries. Although open auctions are widely adopted to curb it, this paper finds that corruption remains prevalent even within this procurement format. Procurement officers can collaborate with firms to manipulate scoring rules, ensuring predetermined winners, while corrupt firms submit noncompetitive bids to meet minimum bidder requirements. Using extensive data from Chinese public procurement auctions, the paper introduces model-driven statistical tools to detect such corruption, identifying a corruption rate of 65 percent. A procurement expert audit survey confirms the tools’ reliability, with a 91 percent probability that experts recognize suspicious scoring rules when flagged. Firm-level analysis reveals that local, state-owned, and less productive firms are favored in corrupt auctions. Lastly, the paper explores policy implications. Analysis of the national anti-corruption campaign since 2012 suggests that general investigations may be insufficient to address deeply ingrained corrupt practices. Using counterfactuals based on an estimated structural model, the paper shows that implementing anonymous call-for-tender evaluations could improve social welfare by 10 percent by eliminating suspicious rules and encouraging broader participation.Publication Labor Demand in the Age of Generative AI: Early Evidence from the U.S. Job Posting Data(Washington, DC: World Bank, 2025-11-18)This paper examines the causal impact of generative artificial intelligence on U.S. labor demand using online job posting data. Exploiting ChatGPT’s release in November 2022 as an exogenous shock, the paper applies difference-in-differences and event study designs to estimate the job displacement effects of generative artificial intelligence. The identification strategy compares labor demand for occupations with high versus low artificial intelligence substitution vulnerability following ChatGPT’s launch, conditioning on similar generative artificial intelligence exposure levels to isolate substitution effects from complementary uses. The analysis uses 285 million job postings collected by Lightcast from the first quarter of 2018 to the second quarter of 2025Q2. The findings show that the number of postings for occupations with above-median artificial intelligence substitution scores fell by an average of 12 percent relative to those with below-median scores. The effect increased from 6 percent in the first year after the launch to 18 percent by the third year. Losses were particularly acute for entry-level positions that require neither advanced degrees (18 percent) nor extensive experience (20 percent), as well as those in administrative support (40 percent) and professional services (30 percent). Although generative artificial intelligence generates new occupations and enhances productivity, which may increase labor demand, early evidence suggests that some occupations may be less likely to be complemented by generative artificial intelligence than others.Publication Investment Policy Reforms and Foreign Direct Investment Inflows(Washington, DC: World Bank, 2025-12-01)Foreign direct investment has the potential to introduce much-needed capital and expertise in emerging and developing economies. To attract foreign direct investment, many countries have eased restrictions on foreign ownership in various sectors, reformed their institutions, and set up investment promotion agencies. Until the mid-2010s, Ethiopia remained one of the few countries that resisted this trend, with several stringent restrictions in place on foreign direct investment entry and operations in the country. This study employs a synthetic control method to examine patterns in foreign capital inflows following a series of investment policy reforms that were substantively introduced in the mid-2010s (circa 2015). The study offers evidence that investment policy reforms contributed to a significant foreign direct investment inflow in Ethiopia, compared to what would have occurred in the absence of these policies. An alternative strategy that conservatively specifies the donor country pool using an AI-assisted deep search technique changes the donor pool weighting matrix of the synthetic control method, but the estimated policy effects largely remain robust to this specification. The findings highlight the importance of targeted reforms in promoting foreign direct investment inflow in developing countries.
Journal
Journal Volume
Journal Issue
Collections
Related items
Showing items related by metadata.
Publication Entry Barriers, Idiosyncratic Distortions, and the Firm-Size Distribution(World Bank, Washington, DC, 2019-09)This paper studies the interaction between entry barriers and idiosyncratic distortions in the context of a standard model of firm dynamics. It derives a strategy to infer entry barriers based on the combination of cross-country data on average firm size, cross-country estimates of idiosyncratic distortions, and equilibrium conditions of the theory. It finds sizable entry barriers that correlate positively with income per-capita. The TFP gains from complete reversals of distortions range between 20 and 50 percent. Idiosyncratic distortions are most distortive in low income countries whereas entry barriers are relatively more detrimental in advanced economies. The study also finds that distortions tend to mitigate each other's negative effect on TFP.Publication Taxing the Good? Distortions, Misallocation, and Productivity in Sub-Saharan Africa(Published by Oxford University Press on behalf of the World Bank, 2020-02)This paper uses comprehensive and comparable firm-level manufacturing censuses from four Sub-Saharan African (SSA) countries to examine the extent, costs, and nature of within-industry resource misallocation between heterogeneous production units. This paper finds evidence of severe misallocation in which resources are diverted away from high-productivity firms towards low-productivity ones, although the magnitude differs across countries. Estimated aggregate productivity gains from the hypothetical equalization of marginal returns range from 30 percent in Côte d’Ivoire to 160 percent in Kenya. The magnitude of reallocation gains appears considerably lower when performing the same counterfactual exercise based on the World Bank Enterprise Surveys once the value-added shares of industries are adjusted using the census data. This suggests that linking firm-level survey data to aggregate outcomes requires census-type data or sampling methods that take the true structure of production into account.Publication Taxing the Good? Distortions, Misallocation, and Productivity in Sub-Saharan Africa(World Bank, Washington, DC, 2017-01)This paper uses comprehensive and comparable firm-level manufacturing census data from four Sub-Saharan African countries to examine the extent, costs, and nature of within-industry resource misallocation across heterogeneous firms. The paper finds evidence of severe misallocation in which resources are diverted away from high-productivity firms toward low-productivity ones in all four countries, although the magnitude differs across countries. The paper shows that a hypothetical reallocation of resources that equalizes marginal returns across firms would increase manufacturing productivity by 31.4 percent in Cote d'Ivoire and as much as 162.7 percent in Kenya. The paper emphasizes the importance of the quality of the underlying data, by comparing the results against those from the World Bank Enterprise Surveys. The comparison finds that the survey-based results underestimate the extent of misallocation vis-a-vis the census. Finally, the paper finds that the size of existing distortions is correlated with various measures of business environment, such as lack of access to finance, corruption, and regulations.Publication The Role of Financial (Mis)allocation on Real (Mis)allocation(Washington, DC: World Bank, 2024-06-20)This paper leverages the novel methodology by Whited and Zhao (2021) to identify financial distortions and applies it to a sample of 24 European countries. The analyses reveal that less developed economies face more severe financial misallocation. Distortions in the allocation of financial resources raise the relative cost of finance for younger, smaller, and more productive firms. Counterfactual analysis indicates that alleviating financial distortions could boost aggregate productivity by approximately 30-70 percent. On average, 75 percent of these gains across countries result from better access to finance, with the remainder from optimizing the debt-to-equity ratio. The paper also quantifies the link between financial misallocation and real-input allocative inefficiency, showing that reducing financial misallocation from the median to the 25th percentile of the cross-industry distribution can increase aggregate productivity by an average of 5.2 percent. The effect is larger, at 6.4 percent, for industries heavily reliant on external finance.Publication The Dynamics of Development(World Bank, Washington, DC, 2018-06)This paper proposes a quantitative model of endogenous firm dynamics to study growth acceleration episodes triggered by reforms. It finds that reversals of entry distortions lead to persistent growth in TFP and declining average firm size, as in the experience of successful post-communist transitions. Removing idiosyncratic distortions results in a more protracted path of TFP and a rising average firm size, as in non-communist growth accelerations. When calibrating the reforms to China’s liberalization, the model accounts for one-third of the observed growth in TFP, while matching the dynamics of average firm size and income inequality..
Users also downloaded
Showing related downloaded files
Publication Argentina Country Climate and Development Report(World Bank, Washington, DC, 2022-11)The Argentina Country Climate and Development Report (CCDR) explores opportunities and identifies trade-offs for aligning Argentina’s growth and poverty reduction policies with its commitments on, and its ability to withstand, climate change. It assesses how the country can: reduce its vulnerability to climate shocks through targeted public and private investments and adequation of social protection. The report also shows how Argentina can seize the benefits of a global decarbonization path to sustain a more robust economic growth through further development of Argentina’s potential for renewable energy, energy efficiency actions, the lithium value chain, as well as climate-smart agriculture (and land use) options. Given Argentina’s context, this CCDR focuses on win-win policies and investments, which have large co-benefits or can contribute to raising the country’s growth while helping to adapt the economy, also considering how human capital actions can accompany a just transition.Publication World Development Report 2006(Washington, DC, 2005)This year’s Word Development Report (WDR), the twenty-eighth, looks at the role of equity in the development process. It defines equity in terms of two basic principles. The first is equal opportunities: that a person’s chances in life should be determined by his or her talents and efforts, rather than by pre-determined circumstances such as race, gender, social or family background. The second principle is the avoidance of extreme deprivation in outcomes, particularly in health, education and consumption levels. This principle thus includes the objective of poverty reduction. The report’s main message is that, in the long run, the pursuit of equity and the pursuit of economic prosperity are complementary. In addition to detailed chapters exploring these and related issues, the Report contains selected data from the World Development Indicators 2005‹an appendix of economic and social data for over 200 countries. This Report offers practical insights for policymakers, executives, scholars, and all those with an interest in economic development.Publication Lebanon Economic Monitor, Fall 2022(Washington, DC, 2022-11)The economy continues to contract, albeit at a somewhat slower pace. Public finances improved in 2021, but only because spending collapsed faster than revenue generation. Testament to the continued atrophy of Lebanon’s economy, the Lebanese Pound continues to depreciate sharply. The sharp deterioration in the currency continues to drive surging inflation, in triple digits since July 2020, impacting the poor and vulnerable the most. An unprecedented institutional vacuum will likely further delay any agreement on crisis resolution and much needed reforms; this includes prior actions as part of the April 2022 International Monetary Fund (IMF) staff-level agreement (SLA). Divergent views among key stakeholders on how to distribute the financial losses remains the main bottleneck for reaching an agreement on a comprehensive reform agenda. Lebanon needs to urgently adopt a domestic, equitable, and comprehensive solution that is predicated on: (i) addressing upfront the balance sheet impairments, (ii) restoring liquidity, and (iii) adhering to sound global practices of bail-in solutions based on a hierarchy of creditors (starting with banks’ shareholders) that protects small depositors.Publication Digital Africa(Washington, DC: World Bank, 2023-03-13)All African countries need better and more jobs for their growing populations. "Digital Africa: Technological Transformation for Jobs" shows that broader use of productivity-enhancing, digital technologies by enterprises and households is imperative to generate such jobs, including for lower-skilled people. At the same time, it can support not only countries’ short-term objective of postpandemic economic recovery but also their vision of economic transformation with more inclusive growth. These outcomes are not automatic, however. Mobile internet availability has increased throughout the continent in recent years, but Africa’s uptake gap is the highest in the world. Areas with at least 3G mobile internet service now cover 84 percent of Africa’s population, but only 22 percent uses such services. And the average African business lags in the use of smartphones and computers as well as more sophisticated digital technologies that catalyze further productivity gains. Two issues explain the usage gap: affordability of these new technologies and willingness to use them. For the 40 percent of Africans below the extreme poverty line, mobile data plans alone would cost one-third of their incomes—in addition to the price of access devices, apps, and electricity. Data plans for small- and medium-size businesses are also more expensive than in other regions. Moreover, shortcomings in the quality of internet services—and in the supply of attractive, skills-appropriate apps that promote entrepreneurship and raise earnings—dampen people’s willingness to use them. For those countries already using these technologies, the development payoffs are significant. New empirical studies for this report add to the rapidly growing evidence that mobile internet availability directly raises enterprise productivity, increases jobs, and reduces poverty throughout Africa. To realize these and other benefits more widely, Africa’s countries must implement complementary and mutually reinforcing policies to strengthen both consumers’ ability to pay and willingness to use digital technologies. These interventions must prioritize productive use to generate large numbers of inclusive jobs in a region poised to benefit from a massive, youthful workforce—one projected to become the world’s largest by the end of this century.Publication Classroom Assessment to Support Foundational Literacy(Washington, DC: World Bank, 2025-03-21)This document focuses primarily on how classroom assessment activities can measure students’ literacy skills as they progress along a learning trajectory towards reading fluently and with comprehension by the end of primary school grades. The document addresses considerations regarding the design and implementation of early grade reading classroom assessment, provides examples of assessment activities from a variety of countries and contexts, and discusses the importance of incorporating classroom assessment practices into teacher training and professional development opportunities for teachers. The structure of the document is as follows. The first section presents definitions and addresses basic questions on classroom assessment. Section 2 covers the intersection between assessment and early grade reading by discussing how learning assessment can measure early grade reading skills following the reading learning trajectory. Section 3 compares some of the most common early grade literacy assessment tools with respect to the early grade reading skills and developmental phases. Section 4 of the document addresses teacher training considerations in developing, scoring, and using early grade reading assessment. Additional issues in assessing reading skills in the classroom and using assessment results to improve teaching and learning are reviewed in section 5. Throughout the document, country cases are presented to demonstrate how assessment activities can be implemented in the classroom in different contexts.