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Idiosyncratic Productivity Shocks and Plant-Level Heterogeneity

Key Words: Plant dynamics, heterogeneity, total factor productivity, growth, Chilean manufacturing.

Using plant-level data on Chilean manufacturing firms for the 1980-99 period, we estimate and characterize disaggregate total factor productivity. We show that idiosyncratic productivity shocks are a quantitatively relevant source of the observed heterogeneity in the behavior of plants. Both exit and input demand decisions are correlated with our estimates of plant level productivity. We then use these estimates to study the microeconomic sources of aggregate growth. We decompose productivity dynamics into production reallocation and within plant efficiency changes. We find that both sources of productivity growth have significantly contributed to efficiency gains in Chile during the last two decades. Although reallocation effects are always positive, the magnitude of their contribution is larger during periods of negative or low growth. Within-plant productivity growth contributes positively only during the 1990s, consistently with the existence of a lag between the implementation of major market oriented structural reforms -- mostly undertaken during the late 1970s and early 1980s -- and their complete effect on the economy. Once reforms were consolidated, unbounded within-plants efficiency gains driven by technology adoption and innovation occurred.