Predation, Protection and Productivity: A Firm-Level Perspective

Abstract

This paper studies the consequences of predation for labor misallocation when firms can deploy guard labor as a means of protecting themselves. We build a simple theory and combine it with data for the 142 countries covered by the World Bank enterprise surveys which ask about firm-level experiences with predation and spending on protection. Our analysis suggests that about two thirds of the output losses are due to protection effort. The paper explores how distortions vary with firm size across countries and how this affects the aggregate output loss. The fact that we have a direct measure of firm-level distortions allows us to provide a direct assessment of their impact. We also study how much investment decisions and sectoral labor allocation are affected by predation.