Discussion Paper Details

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Title: Good Dispersion, Bad Dispersion

Author(s): Matthias Kehrig and Nicolas Vincent

Publication Date: June 2019

Keyword(s): Internal Capital Markets, Misallocation, Multi-Plant Firms and Productivity dispersion

Programme Area(s): Industrial Organization and Macroeconomics and Growth

Abstract: Dispersion in marginal revenue products of inputs across plants is commonly thought to reflect misallocation, i.e., dispersion is "bad." We document that most dispersion occurs across plants within rather than between firms. In a model of multi-plant firms, we then show that dispersion can be "good": Eliminating frictions increases productivity dispersion and raises overall output. Based on this framework, we argue that in U.S. manufacturing, one-quarter of the total variance of revenue products reflects good dispersion. In contrast, we find that in emerging economies, almost all dispersion is bad and the gains from eliminating distortions are larger than previously thought.

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Bibliographic Reference

Kehrig, M and Vincent, N. 2019. 'Good Dispersion, Bad Dispersion'. London, Centre for Economic Policy Research.