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Market failures and misallocation

Ajay Shenoy ()

Journal of Development Economics, 2017, vol. 128, issue C, 65-80

Abstract: I develop a method to measure and separate the production misallocation caused by failures in factor markets versus financial markets. When I apply the method to rice farming villages in Thailand I find surprisingly little misallocation. Optimal reallocation would increase output by less than 19 percent. By 2007 most misallocation comes from factor market failures. I derive a decomposition of aggregate growth that accounts for misallocation. Declining misallocation contributes little to growth compared to factor accumulation and rising farm productivity. I use a government credit intervention to test my measures. I confirm that credit causes a statistically significant decrease in financial market misallocation, but has no effect on factor market misallocation.

Keywords: Misallocation; Agriculture; Imperfect markets (search for similar items in EconPapers)
Date: 2017
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Working Paper: Market Failures and Misallocation (2015) Downloads
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Handle: RePEc:eee:deveco:v:128:y:2017:i:c:p:65-80