GGDC Research Memorandum Nr. 112

Title: Productivity in a Distorted Market: The Case of Brazil's Retail Sector

Author(s): Gaaitzen de Vries

Abstract: In the Hsieh and Klenow (2009) [Hsieh, C., Klenow, P., 2009. Misallocation and Manufacturing TFP in China and India. Quarterly Journal of Economics 124:4] model of monopolistic competition with heterogeneous firms, distortions create a wedge between the opportunity cost and marginal revenue product of factor inputs. For Brazil's retail sector, we use census data to study implications for aggregate productivity and relate distortions with regional variation in regulation using a differences-in-differences approach. We find large potential productivity gains from the reallocation of resources toward the most effcient retailers. These potential gains have gone unexploited during the 1996-2006 period, which provides an explanation for the disappointing economic performance after services liberalization in the 1990s. Relating distortions to regulation, we show the importance of distinguishing effects by firm size and type of distortion. Diffculty in access to credit creates distortions to capital for small firms. Difficulty in access to credit has no discernible effects on medium and large-size firms. Taxes on gross profits create distortions to output for large firms, but do not significantly affect small and medium-size firms. Regulation in national markets may have prevented improvements in allocative effciency.

Date: January 2010 | Full Text