Good Dispersion, Bad Dispersion

We document that most dispersion in marginal revenue products of inputs occurs across plants within firms rather than between firms. This is commonly thought to reflect misallocation: dispersion is “bad”. However, we show that eliminating frictions hampering internal capital markets in a multi-plant firm model may in fact increase productivity dispersion and raise output: dispersion can be “good”. This arises as firms optimally stagger investment activity across their plants over time to avoid raising costly external finance, instead relying on reallocating internal funds. The staggering in turn generates dispersion in marginal revenue products. We use U.S. Census data on multi-plant manufacturing firms to provide empirical evidence for the model mechanism and show a quantitatively important role for good dispersion. Since there is less scope for good dispersion in emerging economies, the difference in the degree of misallocation between emerging and developed economies looks more pronounced than previously thought.

Duke Scholars

Author Matthias Kehrig Economics