The development cost of informality and low debt enforcement

There is a huge literature trying to understand why total factor productivity is much higher is some countries than others. The literature is huge because this is a hugely important question, but also because this is something no one has been able to really model efficiently. There is a lot of punting, especially with reduced-form cross-country regressions that can only highlight correlations, if that, but not causation,

So it is refreshing to see a paper that puts some structure in all that. Hernan Moscoso Boedo and Pablo D'Erasmo build a model (you know, a theory with more than a linear equation...) where firm adopt technologies, some inefficient, and react to various incentive stemming from informality and debt enforcement. The latter two are aspects that have been long identifies as potential sources of underdevelopment. The paper shows that this mechanism can explain up to 60% of total factor productivity differences. This is definitely an interesting way to approach this question.