Rounding error and misallocation

J. Hang, D. Lu () and W. Sha
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D. Lu: Audencia Business School

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Abstract: Measurement error poses a challenge to measuring misallocation. Using Chinese manufacturing data (1998–2007), we exploit rounding — a directly observable form of measurement error — in firms' reported labor, capital, and value added. The share of values ending in zero exceeds 20% for each variable, more than double the 10% uniform benchmark. Within industry-year cells, the standard deviation of log labor productivity is 0.021 higher among firms whose reports end in zero than among firms ending in other non-rounding digits, with a sharply larger differential in small-firm industries. At the aggregate level, including rounded observations lowers estimated allocative efficiency by 1.6 percentage points.

Keywords: Rounding; Misallocation; Measurement error; Productivity dispersion (search for similar items in EconPapers)
Date: 2026-07
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Published in Economics Letters, 2026, 266 (July 2026), pp.113038. ⟨10.1016/j.econlet.2026.113038⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05631098

DOI: 10.1016/j.econlet.2026.113038

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