Productivity in a Distorted Market: The Case of Brazil's Retail Sector
- Note: Thanks to the team at IBGE, the national statistical office of Brazil, for their hospitality and providing access to the firm level data. IBGE ensures confidentiality of responses by requiring researchers to work on site at CDDI with output checked before leaving the premises. This paper benefited from detailed comments by Marcel Timmer, two anonymous referees, the editor Robert Hill, and numerous comments and discussions at the 2008 IARIW conference in Portoroz, the 2010 IARIW conference in Sankt Gallen, the CAED conference at Imperial College, and seminars at the University of Groningen and the Inter-American Development Bank.
In a model of monopolistic competition with heterogeneous firms, distortions in prices drive a wedge between the marginal revenue products of factor inputs across firms. We use census data for Brazil's retail sector to study implications for aggregate productivity and relate distortions to regional variation in regulation using a differences-in-differences approach. Taxes, entry regulation, and access to credit may create distortions to output and capital that varies by firm size. Potential gains from reallocation have not diminished despite the process of services liberalization in the 1990s.