This paper investigates the role of allocation and selection in explaining cross-country differences in productivity. It combines insights from the productivity literature to examine how idiosyncratic (firm-level) policy distortions affect aggregate outcomes. The authors use a rich dataset with harmonized firm-level statistics across several countries to analyze within-industry covariance between size and productivity. They find substantial variation in this covariance across countries, which is influenced by the presence of idiosyncratic distortions. The paper develops a model where heterogeneous firms face adjustment frictions and idiosyncratic distortions, showing that the model can be calibrated to match observed cross-country patterns of within-industry covariance between productivity and size. The authors argue that policy-induced misallocation distortions may explain the observed variation in this covariance across countries. They use an empirical decomposition of industry productivity proposed by Olley and Pakes to quantify the within-industry covariance between size and productivity. The analysis shows that this covariance varies significantly across countries and is affected by the presence of idiosyncratic distortions. The paper also highlights the importance of firm-level data in understanding the role of misallocation and selection in explaining productivity differences. The authors find that the within-industry dispersion of labor productivity is larger than the within-industry dispersion of total factor productivity, and that this finding is robust across countries, industries, and time periods. The paper concludes that misallocation distortions play a significant role in explaining cross-country differences in productivity, and that the model can be used to assess the impact of these distortions on key economic outcomes.This paper investigates the role of allocation and selection in explaining cross-country differences in productivity. It combines insights from the productivity literature to examine how idiosyncratic (firm-level) policy distortions affect aggregate outcomes. The authors use a rich dataset with harmonized firm-level statistics across several countries to analyze within-industry covariance between size and productivity. They find substantial variation in this covariance across countries, which is influenced by the presence of idiosyncratic distortions. The paper develops a model where heterogeneous firms face adjustment frictions and idiosyncratic distortions, showing that the model can be calibrated to match observed cross-country patterns of within-industry covariance between productivity and size. The authors argue that policy-induced misallocation distortions may explain the observed variation in this covariance across countries. They use an empirical decomposition of industry productivity proposed by Olley and Pakes to quantify the within-industry covariance between size and productivity. The analysis shows that this covariance varies significantly across countries and is affected by the presence of idiosyncratic distortions. The paper also highlights the importance of firm-level data in understanding the role of misallocation and selection in explaining productivity differences. The authors find that the within-industry dispersion of labor productivity is larger than the within-industry dispersion of total factor productivity, and that this finding is robust across countries, industries, and time periods. The paper concludes that misallocation distortions play a significant role in explaining cross-country differences in productivity, and that the model can be used to assess the impact of these distortions on key economic outcomes.