How to Use Natural Experiments to Measure Misallocation

56 Pages Posted: 12 Jan 2018 Last revised: 8 Feb 2021

See all articles by David Alexandre Sraer

David Alexandre Sraer

Princeton University; University of California, Berkeley

David Thesmar

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

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Date Written: october 31, 2020

Abstract

We propose a method to estimate the effect of firm policies (e.g., bankruptcy laws or subsidized credit) on allocative efficiency using (quasi-) experimental evidence. Our approach takes general equilibrium effects into account and requires neither a structural estimation nor a precise assumption on how the experiment affects firms. Our aggregation formula relies on treatment effects of the policy on the distribution of output-to-capital ratios, which are easily estimated in (quasi-) experimental data. We show that this method is valid as long as the true data-generating process belongs to a large class of commonly-used models in macro-finance. Finally, we apply this method to the French banking deregulation episode of the mid-1980s and find that this reform led to an increase in aggregate TFP of 2.7%.

Keywords: firm-level experriments; aggregation; misallocation; distorsions

JEL Classification: D24; O47

Suggested Citation

Sraer, David Alexandre and Sraer, David Alexandre and Thesmar, David, How to Use Natural Experiments to Measure Misallocation (october 31, 2020). Available at SSRN: https://ssrn.com/abstract=3099007 or http://dx.doi.org/10.2139/ssrn.3099007

David Alexandre Sraer

Princeton University ( email )

22 Chambers Street
Princeton, NJ 08544-0708
United States

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

David Thesmar (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
Cambridge, MA 02142
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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