Redistributive policies and TFP differences across countries

Economists point towards cross-country differences in TFP to explain wide differences in income per capita across countries. This paper derives theoretical restrictions for interpreting the data based on a neoclassical, dynamic general equilibrium model in which redistributive policies significantly alters overall productivity as measured by the conventional definition of TFP. The numerical simulations of the model?s outcome highlights that whether or not the crosscountry differences in output per capita can be significantly explained by the TFP differences depends on the sources of TFP differences. If in the sample of countries the TFP differences arise mainly due to institutional and demographic factors then input differences would be more significant than TFP differences in explaining differences in output per capita. If, however, the TFP differences arise mainly from differences in the degree of redistribution then the TFP differences would be more significant than input differences.