Bartelsman, E., Haltiwanger, J. and Scarpetta, S. (2013). Cross-Country Differences in Productivity: The Role of Allocation and Selection American Economic Review, 103(1):305--334.

This paper investigates the effect of idiosyncratic (firm-level) policy distortions on aggregate outcomes. Exploiting harmonized firm-level data for a number of countries, we show that there is substantial and systematic cross-country variation in the within-industry covariance between size and productivity. We develop a model in which heterogeneous firms face adjustment frictions (overhead labor and quasi-fixed capital) and distortions. The model can be readily calibrated so that variations in the distribution of distortions allow matching the observed cross-country moments. We show that the differences in the distortions that account for the size-productivity covariance imply substantial differences in aggregate performance. Copyright {\textcopyright} 2013 by the American Economic Association.