Plant Size Distribution and Cross-Country Income Differences

We investigate, using plant-level data for 79 developed and developing countries, whether differences in the allocation of resources across heterogeneous plants are a significant determinant of cross-country differences in income per worker. For this purpose, we use a standard version of the neoclassical growth model augmented to incorporate monopolistic competition among heterogeneous plants. For our preferred calibration, the model explains 58 percent of the log variance of income per worker. This figure should be compared to the 42 percent success rate of the usual model.