This paper, authored by Abhijit V. Banerjee and Esther Duflo, explores the limitations of traditional growth theory, which assumes an aggregate production function and optimal resource allocation. The authors argue that this assumption is flawed due to significant heterogeneity in the rates of return to factors of production within a single economy, which far exceeds cross-country differences. They review evidence from micro-development literature showing that misallocation of resources is common and driven by various market imperfections such as government failures, credit constraints, and behavioral issues. The paper calibrates a model that incorporates these factors and finds that misallocation, combined with fixed costs in production, can explain key aggregate puzzles in developing countries, such as low productivity and Total Factor Productivity. The authors conclude by outlining a non-aggregative growth theory that does not rely on an aggregate production function and suggests empirical approaches to test such models.This paper, authored by Abhijit V. Banerjee and Esther Duflo, explores the limitations of traditional growth theory, which assumes an aggregate production function and optimal resource allocation. The authors argue that this assumption is flawed due to significant heterogeneity in the rates of return to factors of production within a single economy, which far exceeds cross-country differences. They review evidence from micro-development literature showing that misallocation of resources is common and driven by various market imperfections such as government failures, credit constraints, and behavioral issues. The paper calibrates a model that incorporates these factors and finds that misallocation, combined with fixed costs in production, can explain key aggregate puzzles in developing countries, such as low productivity and Total Factor Productivity. The authors conclude by outlining a non-aggregative growth theory that does not rely on an aggregate production function and suggests empirical approaches to test such models.