Policy Distortions and Aggregate Productivity with Heterogeneous Plants

We formulate a version of the growth model in which production is carried out by heterogeneous plants and calibrate it to US data. In the context of this model we argue that differences in the allocation of resources across heterogeneous plants may be an important factor in accounting for cross-country differences in output per capita. In particular, we show that policies which create heterogeneity in the prices faced by individual producers can lead to sizeable decreases in output and measured TFP in the range of 30 to 50 percent. We show that these effects can result from policies that do not rely on aggregate capital accumulation or aggregate relative price differences. More generally, the model can be used to generate differences in capital accumulation, relative prices, and measured TFP.