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The authors investigate the role of dynamic production inputs and their associated adjustment costs in shaping the dispersion of Total Factor Productivity (TFP) and static measures of capital misallocation within a country. Using data on 5,010 establishments in 33 developing countries from the World Bank's Enterprise Research Data, they find that countries exhibiting greater time-series volatility of productivity are also characterized by greater cross-sectional dispersion in productivity. Volatility in TFP explains one quarter to one third of cross-country productivity dispersion.
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