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In less developed economies the allocation of factor inputs to more productive farms is often hindered. To analyze how distortions affect farm dynamics and agricultural productivity, we develop a model of heterogeneous farms investing in productivity improvements. We calibrate the model using detailed farm-level panel data from Vietnam, exploiting regional differences in agricultural institutions. We focus on south Vietnam and quantify the effect of higher measured distortions in the North. We find that the higher distortions in the North reduce agricultural productivity by 38%, accounting for 55% of the observed 2.5-fold difference between regions.
