Production Flexibility, Misallocation and Total Factor Productivity

Burak Uras and Ping Wang

No 23970, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Economy-wide institutional deficiencies causing factor misallocation have been emphasized as essential determinants of aggregate TFP differences. This paper argues that production flexibility at the micro-level is an economic characteristic that should be given priority in TFP aggregation exercises. We investigate a heterogeneous firms model with two distinct notions of flexibility: (i) the firm-specific capacity to optimize over a set of production techniques that serve to organize capital and labor; and, (ii) the industry-specific substitutability between efficient units of capital and labor. We show the presence of a strong interaction between "ability to choose techniques" and "input substitutability": high complementarity at the industry-level amplifies imperfections associated with techniques choice at the firm-level. Using the micro-founded structure, we develop measures for factor, output and technique distortions across a distribution of firms and quantify their TFP effects. For a broad range of U.S. manufacturing industry clusters, technique distortions generate more TFP losses than misallocation resulting from capital and output distortions, with larger TFP gains from removing technique distortions in industries that exhibit high degrees of factor complementarity. Our key quantitative results are robust to outliers, production function specification, mismeasurement and parameterization of the model and are strongly present in developing country datasets.

JEL-codes: D24 E23 O11 O33 (search for similar items in EconPapers)
Date: 2017-10
New Economics Papers: this item is included in nep-eff and nep-tid
Note: DEV EFG PR
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.nber.org/papers/w23970.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:23970

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w23970

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().