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Micro-Level Misallocation and Selection†

Micro-Level Misallocation and Selection† AbstractHow large are the aggregate productivity losses from the misallocation of resources across firms? With endogenous selection, microfrictions can induce extensive margin misallocation among firms: too many unproductive firms are active (Zombies), and too many productive firms are inactive (Shadows). Therefore, the same set of measured distortions potentially induces much larger aggregate productivity losses, as the composition of firms is shifted toward unproductive active firms. I develop and calibrate a model with plant-level microdata for Indonesia to quantify aggregate welfare in the presence of extensive margin misallocation. My estimates show that selection can magnify aggregate TFP losses from microdistortions by over 40 percent compared to existing estimates. Realistic values of measurement error even increase the relative importance of extensive margin misallocation. (JEL D22, D24, E23, J24, J31, O14, O15) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Journal: Macroeconomics American Economic Association

Micro-Level Misallocation and Selection†

Micro-Level Misallocation and Selection†

American Economic Journal: Macroeconomics , Volume 13 (4) – Oct 1, 2021

Abstract

AbstractHow large are the aggregate productivity losses from the misallocation of resources across firms? With endogenous selection, microfrictions can induce extensive margin misallocation among firms: too many unproductive firms are active (Zombies), and too many productive firms are inactive (Shadows). Therefore, the same set of measured distortions potentially induces much larger aggregate productivity losses, as the composition of firms is shifted toward unproductive active firms. I develop and calibrate a model with plant-level microdata for Indonesia to quantify aggregate welfare in the presence of extensive margin misallocation. My estimates show that selection can magnify aggregate TFP losses from microdistortions by over 40 percent compared to existing estimates. Realistic values of measurement error even increase the relative importance of extensive margin misallocation. (JEL D22, D24, E23, J24, J31, O14, O15)

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Publisher
American Economic Association
Copyright
Copyright © 2021 © American Economic Association
ISSN
1945-7715
DOI
10.1257/mac.20160253
Publisher site
See Article on Publisher Site

Abstract

AbstractHow large are the aggregate productivity losses from the misallocation of resources across firms? With endogenous selection, microfrictions can induce extensive margin misallocation among firms: too many unproductive firms are active (Zombies), and too many productive firms are inactive (Shadows). Therefore, the same set of measured distortions potentially induces much larger aggregate productivity losses, as the composition of firms is shifted toward unproductive active firms. I develop and calibrate a model with plant-level microdata for Indonesia to quantify aggregate welfare in the presence of extensive margin misallocation. My estimates show that selection can magnify aggregate TFP losses from microdistortions by over 40 percent compared to existing estimates. Realistic values of measurement error even increase the relative importance of extensive margin misallocation. (JEL D22, D24, E23, J24, J31, O14, O15)

Journal

American Economic Journal: MacroeconomicsAmerican Economic Association

Published: Oct 1, 2021

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