Misallocation or Mismeasurement?

Mark Bils, Peter J. Klenow and Cian Ruane

Journal of Monetary Economics, 2021, vol. 124, issue S, S39-S56

Abstract: The ratio of revenue to inputs differs greatly across plants within countries such as the U.S. and India. Such gaps may reflect misallocation which lowers aggregate productivity. But differences in measured average products need not reflect differences in true marginal products. We propose a way to estimate the gaps in true marginal products in the presence of measurement error. Our method exploits how revenue growth is less sensitive to input growth when a plant’s average products are overstated by measurement error. For Indian manufacturing from 1985 to 2013, our correction lowers potential gains from reallocation by 20%. For the U.S. the effect is even more dramatic, reducing potential gains by 60% and eliminating 2/3 of a severe downward trend in allocative efficiency over 1978 to 2013.

Keywords: Misallocation; Measurement error; Productivity (search for similar items in EconPapers)
JEL-codes: O11 O47 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (38)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:124:y:2021:i:s:p:s39-s56

DOI: 10.1016/j.jmoneco.2021.09.004

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