Misallocation or Mismeasurement?

41 Pages Posted: 3 Feb 2020

See all articles by Mark Bils

Mark Bils

University of Rochester - Department of Economics; National Bureau of Economic Research (NBER)

Peter Klenow

Stanford University

Cian Ruane

International Monetary Fund (IMF)

Date Written: January 2020

Abstract

The ratio of revenue to inputs differs greatly across plants within countries such as the U.S. and India. Such gaps may reflect misallocation which hinders aggregate productivity. But differences in measured average products need not reflect differences in true marginal products. We propose a way to estimate the gaps in true marginal products in the presence of measurement error. Our method exploits how revenue growth is less sensitive to input growth when a plant’s average products are overstated by measurement error. For Indian manufacturing from 1985-2013, our correction lowers potential gains from reallocation by 20%. For the U.S. the effect is even more dramatic, reducing potential gains by 60% and eliminating 2/3 of a severe downward trend in allocative efficiency over 1978-2013.

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Suggested Citation

Bils, Mark and Klenow, Peter and Ruane, Cian, Misallocation or Mismeasurement? (January 2020). NBER Working Paper No. w26711, Available at SSRN: https://ssrn.com/abstract=3530682

Mark Bils (Contact Author)

University of Rochester - Department of Economics ( email )

Harkness Hall
Rochester, NY 14627-0158
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Peter Klenow

Stanford University ( email )

Stanford, CA 94305
United States

Cian Ruane

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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