Entrepreneurship and misallocation in production network economies

Tiago Cavalcanti, Angelo Mendes and Pierluca Pannella
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Angelo Mendes: University of Minnesota
Pierluca Pannella: Sao Paulo School of Economics-FGV

Economic Theory, 2024, vol. 78, issue 1, No 2, 29-68

Abstract: Abstract This paper investigates how sectoral linkages amplify or diminish misallocation at the intensive and extensive margins. Our analysis is based on a multisector general equilibrium model with input–output linkages, heterogeneous entrepreneurial abilities, and endogenous occupational choice. Distortions affect the intensive use of production inputs and they also impact the agents’ occupational decisions, misallocating the mass and type of entrepreneurs in different sectors of production. When the most distorted sectors are upstream (downstream), input–output linkages amplify (diminish) the loss from entreprenurial misallocation. We calibrate the model to the US and quantify the output losses from sectoral corporate taxes, decomposing the role of networks and the extensive margin decisions. We find that sectoral linkages quadruple the loss from the misallocation of entrepreneurs. We study an entry subsidy program, showing that it should target those sectors whose marginal entrepreneurs suffer larger profit losses, even if they are not necessarily the most distorted.

Keywords: Distortions; Firm entry; Production network; Aggregate misallocation (search for similar items in EconPapers)
JEL-codes: E23 L26 O11 O41 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s00199-023-01535-8

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