 Can land misallocation be a greater barrier to development than capital? Evidence from manufacturing firms in Sri LankaRanpati Dewage Thilini Sumudu Kumari, Shawn Xiaoguang Chen, Bei Li and Sam Hak Kan Tang Economic Modelling, 2023, vol. 126, issue C Abstract: We quantify cross-firm misallocation in land and compare it with that in capital. Misallocation arises when a production factor produces greater marginal revenue product (MRP) in some firms than in others because the former firms have to pay a higher shadow production factor price which is usually distorted by persistent institutional factors. Consequently, the aggregate total factor productivity (TFP) could be increased through cross-firm factor reallocation within an industry. Existing literature mainly emphasizes the misallocation in capital and labour, or in agricultural land. Little is done to quantify the misallocation of industrial land. By using annual-firm-level survey data from Sri Lanka's manufacturing sector over 1994–2015, we find that the aggregate TFP gain from reallocating land is about five times of that from capital. Further, we find that firms can hardly grow bigger due to size-dependent land distortion. The results suggest that land distortion can be a crucial barrier to development. Keywords: Capital misallocation; Developing country; Firm-level distortion; Land misallocation; Sri Lanka; TFP (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:126:y:2023:i:c:s0264999323001803 DOI: 10.1016/j.econmod.2023.106368 Access Statistics for this article Economic Modelling is currently edited by S. Hall and P. Pauly More articles in Economic Modelling from Elsevier |
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