Misallocation in production networks across space: The role of regulation and firm lobbying in the US

70 Pages Posted: 19 Jul 2023

Date Written: July 9, 2023

Abstract

In this paper, I examine the role of regulation and firm lobbying in shaping the structure of US production networks, and its implications for misallocation in production networks across space. Using several instrumental variable strategies and an event-study design, I establish that firms that lobby have more buyers and suppliers, and such effects are more pronounced for larger firms, firms subject to more regulations, and distant buyersupplier connections. Further examination suggests that lobbying reduces misallocation in production networks, which is especially effective in bypassing distortive regulations. A novel quantitative model of spatial production networks indicates that the degree-lobbying gradient serves as a sufficient statistic for misallocation, and lobbying reduces misallocation by 22%, and explains 3.2% of the gain of aggregate productivity during 1999-2020. A model without production networks or space delivers quantitatively and even qualitatively different results.

Keywords: input-output linkages, lobbying, misallocation, productivity, space, production networks

JEL Classification: D22, D72, G38, L14, L51, L98, P43

Suggested Citation

Shi, Xiangyu, Misallocation in production networks across space: The role of regulation and firm lobbying in the US (July 9, 2023). Available at SSRN: https://ssrn.com/abstract=4497141 or http://dx.doi.org/10.2139/ssrn.4497141

Xiangyu Shi (Contact Author)

Yale University ( email )

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