Idiosyncratic Distortions and Technology Adoption

Abstract: Recent work shows that resource misallocation has a substantial negative effect on aggregate productivity in developing countries.  In this paper, I show that the same underlying institutions are also important for explaining cross-country technology differences.  I study a model of heterogeneous firms that choose both labour and technology inputs.  Firms differ in underlying productivity and an idiosyncratic distortion - modeled as a wedge on revenues.  Distortions delay adoption by lowering the marginal benefits firms receive from adopting new technologies. At the aggregate level, distortions that tend to target, otherwise, highly productive firms delay the initial adoption of new technologies. In the calibrated model, distortions account for a large portion of the observed cross-country technology differences. Moving from the distortions of the bottom decile economy to the United States level increases productivity by 89% and explains just under half of the observed adoption lag. Furthermore, over half of the change is attributed to a dynamic channel in which firms adjust their technology.