Firms in developing countries exhibit large variations in revenue and output, (given the level of their inputs). A number of researchers have suggested that this is due to “capital misallocation”, i.e. capital does not flow to the households, firms, and entrepreneurs who can use it most productively. There are, however, other plausible explanations of the variability of input-adjusted revenue. One is that firms with greater market power (perhaps because they are more innovative) may charge higher prices and thus generate greater revenues from identical production functions.
