Misallocation and the Distribution of Global Volatility
American Economic Review, 2017, vol. 107, issue 2, 592-622
Decreasing returns at the macro level are an outcome of efficiency at the micro level. When inputs are scarce, an efficient economy carries out only the most productive projects; when inputs are abundant, the economy implements less productive projects as well. This link between decreasing returns and efficiency suggests that misallocation can reduce the extent of aggregate decreasing returns. I formalize this connection and establish two main results: (i) misallocation amplifies the volatility of output with respect to fluctuations in inputs; and (ii) financial integration amplifies shocks in relatively distorted economies, but mitigates them in less distorted economies.
JEL-codes: D24 D82 E23 E32 E44 F41 (search for similar items in EconPapers)
Note: DOI: 10.1257/aer.20150314
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