Three Essays on Firm Dynamics and Development

Abstract

This thesis is a collection of three essays on firm dynamics and development. These essays consider the interaction between the dynamics of allocative efficiency and economic growth from the three different perspectives.

The first essay quantitatively analyses the role of allocative efficiency in explaining growth miracles. It builds a heterogeneous firm model with entry and exit. The model economy converges to a more efficient steady state by selecting more productive firms and reallocating resources to them. Frictions obstruct firm selection and labour reallocation and delay the convergence for decades. Meanwhile, slow efficiency improvement continuously increases productivity and contributes to miraculous growth. In counterfactual experiments, higher-level frictions decrease both the aggregate productivity in the new steady state and the speed of convergence.

The second essay investigates how technological diffusion could shape the high productivity dispersion and exaggerate the so-called allocative inefficiency in emerging economies. It develops a growth model with heterogeneous firms and simulates the dynamics of its productivity distribution during a catch-up process. Firms in the model economy learn about new technology from the world frontier. Their learning speeds differ. When they start to catch up to the frontier, fast learners get close to the frontier in a short time while slow learners remain close to their original low productivity. Consequently, productivity dispersion increases. Furthermore, when adjustment costs exist, marginal productivity is correlated with productivity, so its dispersion increases as well. The economy appears more inefficient. After a long period of learning, slow learners ultimately narrow the gap to frontier. In the new steady state, the productivity dispersion is low again and the economy once again appears efficient even without the reductions to adjustment costs. In the simulation of China, the economy has already passed the bottom of U-shaped pattern. The productivity dispersion and so-called allocative inefficiency keeps decreasing until convergence. The result suggests that the different productivity dispersions in emerging and developed economies can be a consequence of their different stages of development.

The third essay explores the role of recessions in resource reallocation. It focuses on capital reallocation from the low-productivity state sector to the high-productivity private sector. During recessions, state-owned enterprises liquidate capital to repay debt. Private firms take over the realised resources. This improves allocative efficiency. The timing of a recession is important. In the early stage of transformation, private firms are too small to take over all the liquidated capital. The impact of the insufficient resource reallocation is limited. However, the recession influences the economy for a longer period, so the cumulative welfare gain is large. By contrast, a late recession without fire sales generates a large temporary welfare gain, but a relatively small cumulative welfare gain.