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Misallocations go a long way: evidence from firm-level data

Jan Hagemejer, Peter Szewczyk and Joanna Tyrowicz ()
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Peter Szewczyk: University of Warsaw

No 31, GRAPE Working Papers from GRAPE Group for Research in Applied Economics

Abstract: We analyze the link between resource misallocation and subsequent long-run economic growth. We use two unique and novel sources of data for Poland and measure misallocation inherited from the period of central planning, i.e. period where input prices did not determine the use of inputs at firm, industry and country level. We assess sectoral, regional and cohort dimension of the inputs misallocation. We then show that undercapitalization was more prevalent that overcapitalization, and that it was due mostly to the firm and sector level variation in factor inputs. Given this insight, subsequent reallocation of the resources required shifting of inputs not only between firms, but also between sectors: a process which is relatively more prone to frictions due to specialization and information. When analyzing the link to the rate of growth once market mechanisms were reinstated, we find that regions with more misaligned firms (especially in terms of undercapitalization) experienced lower subsequent economic growth. This result proves highly robust, even three decades since the market mechanisms were reinstated.

Keywords: misallocation; privatization; transition (search for similar items in EconPapers)
JEL-codes: P31 D24 O47 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-eff and nep-tra
Date: 2018
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