What Is the Extent of Misallocation?
59 Pages Posted: 20 Oct 2017 Last revised: 3 Feb 2018
Date Written: January 13, 2018
How much output is forgone due to market distortions? Recent studies suggest that there is substantial misallocation of resources, not just in developing economies, but also in developed economies. Frequently cited sources of distortions include regulations, financial frictions and family ownership. However, data availability has thus far forced researchers to rely on model-based inference and indirect measurement; as a consequence, we still know very little about the true extent and causes of misallocation. In this study, we exploit, for the first time, a combination of financial and survey data from a large, representative sample of EU manufacturing firms to reveal firm-level heterogeneity in policy and financial frictions. Using this rich data and a novel econometric methodology which is robust to mis-specification and endogeneity of the firm-level production function, we estimate the loss in aggregate industry output attributable to resource misallocation due to family control, bureaucracy, financial constraints and labor regulation. We find that the percentage loss in real output attributable to these factors to be at most one percent, in each of the six countries covered in our dataset (France, Germany, Hungary, Italy, Spain and the United Kingdom). We also introduce a number of methodological innovations that substantially reduce the upward bias in current estimates of the extent of misallocation.
Keywords: Misallocation, Frictions, Growth, Productivity, Heterogeneous Firms, Distortions, Macroeconomics, Policy
JEL Classification: D, D2, D22, D24, E, E02, E2, E23, L, L1, L11, O, O4, O43, O47, O5, O52, P, P1, P16
Suggested Citation: Suggested Citation