DP6138 Macroeconomic Implications of Size-Dependent Policies

Author(s): Nezih Guner , Gustavo Ventura , Yi Xu

Publication Date: February 2007

Keyword(s): establishment size , productivity differences , size distortions

JEL(s): E23 , O40

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP6138.asp.asp

Government policies that impose restrictions on the size of large establishments or firms, or promote small ones, are widespread across countries. In this paper, we develop a framework to systematically study policies of this class. We study a simple growth model with an endogenous size distribution of production units. We parameterize this model to account for the size distribution of establishments and for the (observed) large share of employment in large establishments. Then, we ask: quantitatively, how costly are policies that distort the size of production units? What is the impact of these policies on productivity measures, the equilibrium number of establishments and their size distribution? We find that these effects are potentially large: policies that reduce the average size of establishments by 20% lead to reductions in output and output per establishment up to 8.1% and 25.6% respectively, as well as large increases in the number of establishments (23.5%).