Innovation Coordination Failures and Endogenous Productivity: On the Dynamic Effect of Misallocation

Several papers have shown that misallocation of resources among heterogeneous firms can have damaging consequences for countries’ total factor productivity. The present work studies the impact of these distortions when they affect not only present productivity, but also the dynamics of future productivity, in an environment where agent decisions can generate coordination failures. This analysis will be carried out from a general equilibrium model of heterogeneous firms with partially endogenous productivity, in which firms have the ability to affect their future productivity by means of risky experiments, which take the form of productivity shocks, and coordination failures are generated from a complementarity of demand. Equilibrium analyses state the boundary conditions for extreme scenarios, with pure strategy, in which none or all firms invest in innovation, or for an intermediary scenario, with mixed strategies. Those conditions, however, are sensitive to aggregate and productivity-dependent distortions, suggesting that the current causes of misallocation of resources may carry long-lasting consequences to the growth path of TFP as well.