Inefficient Exit of Firms : Measuring the Impact on Aggregate Productivity

I develop a model of firm-dynamics which provides a theoretical characterization as well as a new empirical test for inefficient firm exit. When applied to European firm-level data, my test results suggest that firm exit is less efficient in lower income countries. I show that the model can be calibrated to match the empirically estimated measure of inefficient exit as well as the conventionally used measure of misallocation in all sample economies. Counter-factual experiments conducted with the calibrated model indicate that a more efficient firm selection can increase aggregate productivity by as much as 75%, implying large reductions in the productivity gap across countries. JEL: O11, O47, D21, D22