Policy distortions and aggregate productivity with endogenous establishment-level productivity

What accounts for income per capita and total factor productivity (TFP) differences across countries? We study resource misallocation heterogeneous production units in a general equilibrium model where establishment size are affected by policy distortions. solve the closed form show that distortions have substantial negative effect on growth, average size, aggregate productivity. Calibrating distorted benchmark economy to U.S. data, we find empirically reasonable variations generate reductions TFP of more than 24 percent while slightly increasing concentration distribution. If addition lower exit rate incumbent establishments, as supported some empirical evidence, loss doubles 48 percent.