Micro-level Misallocation and Selection

Mu-Jeung Yang

American Economic Journal: Macroeconomics, 2021, vol. 13, issue 4, 341-68

Abstract: How large are the aggregate productivity losses from the misallocation of resources across firms? With endogenous selection, microfrictions can induce extensive margin misallocation among firms: too many unproductive firms are active (Zombies), and too many productive firms are inactive (Shadows). Therefore, the same set of measured distortions potentially induces much larger aggregate productivity losses, as the composition of firms is shifted toward unproductive active firms. I develop and calibrate a model with plant-level microdata for Indonesia to quantify aggregate welfare in the presence of extensive margin misallocation. My estimates show that selection can magnify aggregate TFP losses from microdistortions by over 40 percent compared to existing estimates. Realistic values of measurement error even increase the relative importance of extensive margin misallocation.

JEL-codes: D22 D24 E23 J24 J31 O14 O15 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (9)

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DOI: 10.1257/mac.20160253

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