The Whole is Greater than the Sum of Its Parts : Complementary Reforms to Address Microeconomic Distortions

This paper links microeconomic rigidities and technological adoption to propose a partial explanation for the observed differences in income per capita across countries. The paper first presents a neoclassical general equilibrium model with heterogeneous production units. It assumes that developing...

Full description

Bibliographic Details
Main Authors:	Bergoeing, Raphael, Loayza, Norman V., Piguillem, Facundo
Format:	Journal Article
Published:	Published by Oxford University Press on behalf of the World Bank 2018
Subjects:	ECONOMIC DISTORTIONS CAPITAL FLOWS INVESTMENT BARRIERS MICROECONOMIC RIGIDITIES INCOME GAP
Online Access:	http://hdl.handle.net/10986/29121

id	okr-10986-29121
recordtype	oai_dc
spelling	okr-10986-291212021-05-25T10:54:42Z The Whole is Greater than the Sum of Its Parts : Complementary Reforms to Address Microeconomic Distortions Bergoeing, Raphael Loayza, Norman V. Piguillem, Facundo ECONOMIC DISTORTIONS CAPITAL FLOWS INVESTMENT BARRIERS MICROECONOMIC RIGIDITIES INCOME GAP This paper links microeconomic rigidities and technological adoption to propose a partial explanation for the observed differences in income per capita across countries. The paper first presents a neoclassical general equilibrium model with heterogeneous production units. It assumes that developing countries do not generate frontier technologies but can adopt them by investing in new capital, which requires firm renewal. The model analyzes how this process can be hindered by barriers to the entry of new investment projects and the exit of obsolete ones. It finds that there are nonlinearities in the way entry and exit barriers operate: Barriers have increasing costs, and they reinforce each other's negative impact. The paper then calibrates and simulates the model to measure the impact of these barriers on the GDP per capita gap between the United States and a large sample of developing countries. It accounts for a range of 26 to 60% of the income gap between the United States and 107 developing countries. Most importantly, the model implies that, for the median developing economy, about 50% of the simulated gap is explained by the interaction of entry and exit barriers (and the rest by their individual effects). The paper's main policy implication is that only comprehensive reforms can have substantial effects, especially when initial distortions are large. If they are too narrow (focusing on only one barrier) or too mild (leaving in place a large distortion), microeconomic reforms are unlikely to have significant effects on aggregate productivity and output growth. 2018-01-03T20:05:02Z 2018-01-03T20:05:02Z 2016-07-01 Journal Article World Bank Economic Review 1564-698X http://hdl.handle.net/10986/29121 CC BY-NC-ND 3.0 IGO http://creativecommons.org/licenses/by-nc-nd/3.0/igo World Bank Published by Oxford University Press on behalf of the World Bank Publications & Research :: Journal Article Publications & Research
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
topic	ECONOMIC DISTORTIONS CAPITAL FLOWS INVESTMENT BARRIERS MICROECONOMIC RIGIDITIES INCOME GAP
spellingShingle	ECONOMIC DISTORTIONS CAPITAL FLOWS INVESTMENT BARRIERS MICROECONOMIC RIGIDITIES INCOME GAP Bergoeing, Raphael Loayza, Norman V. Piguillem, Facundo The Whole is Greater than the Sum of Its Parts : Complementary Reforms to Address Microeconomic Distortions
description	This paper links microeconomic rigidities and technological adoption to propose a partial explanation for the observed differences in income per capita across countries. The paper first presents a neoclassical general equilibrium model with heterogeneous production units. It assumes that developing countries do not generate frontier technologies but can adopt them by investing in new capital, which requires firm renewal. The model analyzes how this process can be hindered by barriers to the entry of new investment projects and the exit of obsolete ones. It finds that there are nonlinearities in the way entry and exit barriers operate: Barriers have increasing costs, and they reinforce each other's negative impact. The paper then calibrates and simulates the model to measure the impact of these barriers on the GDP per capita gap between the United States and a large sample of developing countries. It accounts for a range of 26 to 60% of the income gap between the United States and 107 developing countries. Most importantly, the model implies that, for the median developing economy, about 50% of the simulated gap is explained by the interaction of entry and exit barriers (and the rest by their individual effects). The paper's main policy implication is that only comprehensive reforms can have substantial effects, especially when initial distortions are large. If they are too narrow (focusing on only one barrier) or too mild (leaving in place a large distortion), microeconomic reforms are unlikely to have significant effects on aggregate productivity and output growth.
format	Journal Article
author	Bergoeing, Raphael Loayza, Norman V. Piguillem, Facundo
author_facet	Bergoeing, Raphael Loayza, Norman V. Piguillem, Facundo
author_sort	Bergoeing, Raphael
title	The Whole is Greater than the Sum of Its Parts : Complementary Reforms to Address Microeconomic Distortions
title_short	The Whole is Greater than the Sum of Its Parts : Complementary Reforms to Address Microeconomic Distortions
title_full	The Whole is Greater than the Sum of Its Parts : Complementary Reforms to Address Microeconomic Distortions
title_fullStr	The Whole is Greater than the Sum of Its Parts : Complementary Reforms to Address Microeconomic Distortions
title_full_unstemmed	The Whole is Greater than the Sum of Its Parts : Complementary Reforms to Address Microeconomic Distortions
title_sort	whole is greater than the sum of its parts : complementary reforms to address microeconomic distortions
publisher	Published by Oxford University Press on behalf of the World Bank
publishDate	2018
url	http://hdl.handle.net/10986/29121
_version_	1764468547297214464

The Whole is Greater than the Sum of Its Parts : Complementary Reforms to Address Microeconomic Distortions

Similar Items