DP13772 Good Dispersion, Bad Dispersion

Author(s): Matthias Kehrig, Nicolas Vincent
Publication Date: June 2019
Keyword(s): Internal Capital Markets, Misallocation, Multi-Plant Firms, Productivity dispersion
JEL(s): E2, G3, L2, O4
Programme Areas: Industrial Organization, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13772

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.