higher by at least 31 % in Cˆote d’Ivoire, 67% in Ethiopia, 76% in Ghana, and 162% in Kenya.

Even though the method utilized to measure misallocation is fairly straightforward to apply, we highlight the biases that can be incurred in the interpretation of the results from limitations in the underlying datasets. To emphasize this point, we compare our results, obtained from Census-based datasets, with those obtained from an alternative and readily available source, the World Bank’s Enterprise Surveys (ES). We start assessing the accuracy of the ES in terms of capturing the features of the size distribution of firms relative to the Censuses. We show that except in Kenya, where the sample in the ES is taken straight from the Census, the size distribution in Cˆote d’Ivoire’s, Ghana’s and Ethiopia’s ES diverges from their census-based counterparts. In particular, the pattern is that the ES overestimates the size of the highest percentiles in the firm size distribution. We then evaluate the implication of this bias for the resulting measures of misallocation and the counterfactual gains in productivity from its reversal. When weighting sectors according to sectoral value added shares in the Census, we find that the degree of productivity losses implied by misallocation in the ES are significantly smaller. We see this finding as raising a warning to the precipitate application of the methodology. Ensuring adequate size and sectoral representation in the data stands as an important ingredient for the robustness of the results.

As a first step in an attempt to connect the observed misallocation to concrete policies and distortions, we explore two additional dimensions of the distribution of distortions: its decomposition into capital/labor ratio wedges and revenue wedges, and its evolution over the firm’s life cycle.<sup>2</sup> The first dimension is informative to identify whether it is the policies affecting the functioning of financial and labor markets that are a more binding constraint for the economy, or if it is the case that policies affecting capital and labor equally, such as monopoly power and other product market frictions, are more prevalent. We find that output distortions are more strongly correlated with firms’ physical productivities than capital-labor ratio distortions and, thus, are relatively more important in accounting for that total gains from efficient reallocation. In terms of the firms’ life-cycle pattern of growth and the role distortions play in shaping it, we find the growth of employment over time, conditional on survival, is remarkably flat. This is consistent with evidence documented by Hsieh and Klenow (2014) for India and Mexico. We also find that the flat pattern of life-cycle growth is mostly accounted for by the life-cycle evolution of physical productivity, with a minor role played by an age-dependent component in the distribution of distortions.

We conclude the paper with an econometric exercise aimed at further tightening the connection between observed misallocation and actual policies and distortions that increase the cost of doing business. Appealing to quantitative measures of the quality of the business environment captured in the World Bank’s Enterprise Surveys, such as accessibility to credit or fees and payments to government officials; and exploiting sub-national variation of these costs, we find suggestive evidence that some of these business environment indicators have a significant correlation with the observed distortions that we find in the data. Nonetheless, the lack of variation in the data at the level of the firm as well as many potential confounding factors in the identification raise a word of caution in interpreting the size and direction of our results. Our view, which is shared by similar attempts at connecting distortions to

> 2To clarify the distinction between capital/labor and revenue wedges, the former refers to distortions that interfere with the optimal capital to labor ratio in the firm, while the latter refers to distortions that affect the entire scale of operation of the firm without disrupting the ratio of capital to labor.

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