Economy-wide institutional deficiencies causing factor misallocation have been emphasized as essential determinants of aggregate TFP differences. This paper argues that production flexibility at the micro-level is an economic characteristic that should be given priority in TFP aggregation...

We develop a generalized production framework with endogenous production techniques that serve to organize raw factor inputs in an efficient manner. We establish a positive relationship between production flexibility and cost efficiency. By allowing firms to differ in technology scales, capital...