Multi-product firms and misallocation

Wenya Wang and Ei Yang

Journal of Development Economics, 2023, vol. 163, issue C

Abstract: This paper studies how distortions alter firms’ product decisions. Using two firm-level datasets in China, we find (i) that multi-product (MP) firms are fewer and smaller in China than in the United States and (ii) that the MP probability of a firm is negatively associated with the level of distortion. We build discrete product choices into a heterogeneous firm model à la Melitz (2003) with entry and exit. Firms are subject to a size-dependent distortion that increases in firm-level productivities and product-level tastes. Calibrated to firm-level data moments in the United States and China, the model generates a welfare loss of 30% compared to the distortion-free economy. 24% of the overall loss is from the distorted product margin, while most of the rest is from the static misallocation as in Hsieh and Klenow (2009).

Keywords: Multi-Product, Fewer-and-Smaller, Distortions, Product Margin, Misallocation (search for similar items in EconPapers)
JEL-codes: E44 L11 O11 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304387823000573
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:deveco:v:163:y:2023:i:c:s0304387823000573

DOI: 10.1016/j.jdeveco.2023.103102

Access Statistics for this article

Journal of Development Economics is currently edited by M. R. Rosenzweig

More articles in Journal of Development Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().