Wedges: A Microeconomic Perspective on Misallocation

Lauren Falcao Bergquist, Danial Lashkari and Eric Verhoogen
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Lauren Falcao Bergquist: Yale University
Danial Lashkari: New York Federal Reserve Bank
Eric Verhoogen: Columbia University

No 2482, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: This chapter, prepared for the Handbook of Development Economics (Vol. 6), reviews recent microeconomic evidence on the causes of resource misallocation in developing countries. It distinguishes between ÒtechnologicalÓ and ÒdistortionaryÓ wedges, develops a unified theoretical framework linking market power, taxes, financial frictions, and firm dynamics, and summarizes empirical findings from the Òdirect approachÓ to misallocation. The authors emphasize how wedges vary by firm size and discuss policy implications for improving allocative efficiency.

Pages: 98 pages
Date: 2026-01-05
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