Input-Output Networks and Misallocation

49 Pages Posted: 27 Oct 2020

See all articles by Jing Hang

Jing Hang

University of California, Los Angeles (UCLA) - Department of Economics

Pravin Krishna

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS); Brown University - Department of Economics; National Bureau of Economic Research (NBER)

Heiwai Tang

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS); The University of Hong Kong - Faculty of Business and Economics; CESIfo; Kiel Institute for the World Economy

Date Written: October 2020

Abstract

This paper develops a framework for studying the macroeconomic costs of resource misallocation. The framework enables the assessment of the conditions under which the existing estimates in the misallocation literature, which are largely based on a value-added production structure and ignore inter-sectoral linkages, provide an unbiased estimate of misallocation costs in relation to a more general setting, in which production of gross output relies upon input-output linkages across sectors. We show that in the absence of intermediate input distortions, the two approaches are isomorphic and will yield the same estimated aggregate productivity loss. When firm-specific intermediate input distortions are present, however, the value-added model produces biased estimates of TFP losses due to both model misspecification and incorrect inferences of firms' productivity and distortions. Using Chinese and Indian enterprise data, we find quantitatively similar TFP losses from resource misallocation for China, regardless of the model used, while for India, we infer significantly larger TFP losses under the gross output model.

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Suggested Citation

Hang, Jing and Krishna, Pravin and Tang, Heiwai, Input-Output Networks and Misallocation (October 2020). NBER Working Paper No. w27983, Available at SSRN: https://ssrn.com/abstract=3718895

Jing Hang (Contact Author)

University of California, Los Angeles (UCLA) - Department of Economics ( email )

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Pravin Krishna

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS) ( email )

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Brown University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Heiwai Tang

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS) ( email )

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The University of Hong Kong - Faculty of Business and Economics ( email )

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Kiel Institute for the World Economy ( email )

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