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A Tale of Two Sectors: Why is Misallocation Higher in Services than in Manufacturing?

Daniel Dias (), Carlos Marques () and Christine Richmond ()

Review of Income and Wealth, 2020, vol. 66, issue 2, 361-393

Abstract: Recent empirical studies document that the level of resource misallocation in the service sector is significantly higher than in the manufacturing sector. We quantify the importance of this difference and study its sources. Conservative estimates for Portugal in 2008 show that closing this gap, by reducing misallocation in the service sector to manufacturing levels, would boost aggregate gross output by around 12 percent and aggregate value added by around 31 percent. Differences in the effect and size of productivity shocks explain most of the gap in misallocation between manufacturing and services, while the remainder is explained by differences in firm productivity and age distributions. We interpret these results as stemming mainly from higher output‐price rigidity, higher labor adjustment costs and higher informality in the service sector.

Date: 2020
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https://doi.org/10.1111/roiw.12416

Related works:
Working Paper: A Tale of Two Sectors: Why is Misallocation Higher in Services than in Manufacturing? (2018) Downloads
Working Paper: A Tale of Two Sectors: Why is Misallocation Higher in Services than in Manufacturing? (2016) Downloads
Working Paper: A tale of two sectors: why is misallocation higher in services than in manufacturing? (2016) Downloads
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