Input-Output Networks and Misallocation

Jing Hang, Pravin Krishna and Heiwai Tang

No 27983, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: E1 E23 L16 O11 O4 (search for similar items in EconPapers)
Date: 2020-10
New Economics Papers: this item is included in nep-bec, nep-cna, nep-mac, nep-net and nep-tid
Note: DEV ITI PR
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