What determines the distribution of establishments in terms of size and life-cycle growth? How are those determinants related to aggregate productivity? We provide novel answers by developing a framework that uses price and quantity information on establishments’ outputs and inputs to jointly estimate the demand and production parameters, and subsequently, establishments’ quality-adjusted productivity, deriving both micro-level and aggregate implications. We find that the dominant source of variation in establishment size is variation in quality/product appeal but that variation in technical efficiency plays an important supporting role. Multiple factors dampen dispersion in establishment size including dispersion in input (quality-adjusted) prices, markups, and residual wedges. Relatively moderate dampening factors induce large aggregate allocative efficiency losses relative to their absence. We show that joint estimation of the parameters of the demand and production function crucially affects inferences on the determinants of the size distribution of firms and their implications for aggregate productivity.

A quantitative model brings together theories linking international trade to quality, technology, and demand for skills. Standard effects of trade on importers and exporters are magnified through domestic input linkages. We estimate the model with data from Colombian manufacturing firms before the 1991 trade liberalization. A counterfactual trade liberalization is broadly consistent with post-liberalization data. It increases skill intensity from 12 to 16 percent, while decreasing sales. Imported inputs, estimated to be of higher quality, and domestic input linkages are quantitatively important. Economies of scale, export expansion, and reallocation of production are small and cannot explain post-liberalization data.

Relative to backward firms, technologically-advanced firms source inputs from other advanced firms. These sourcing patterns lead to a magnification effect of technology adoption. A firm that adopts higher-technology increases the relative supply and demand for higher-technology inputs. As a result, it positively influences the technology of other firms in its production chain. Using data from a Colombian manufacturing survey, we provide evidence that advanced firms disproportionately value advanced inputs. More novel, we provide suggestive evidence that technological advancements in some firms increase the technology of other firms indirectly linked to them through a common input market.

We analyze nonlinear adjustments of capital and labor using plant data from the Colombian Annual Manufacturing Survey, allowing for interdependence in adjustments of the two factors. We find nonlinear employment and capital adjustments. We also find that capital shortages reduce hiring, and labor surpluses reduce capital shedding. Moreover, we find that job destruction and capital formation increased after factor market deregulation in Colombia. Finally, we find that completely eliminating frictions in factor adjustment would yield a substantial increase in aggregate productivity through improved allocative efficiency, but that the actual impact of the Colombian deregulation on productivity was modest.