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Productivity and Misallocation in General Equilibrium

David Baqaee and Emmanuel Farhi ()

No 24007, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We provide a general non-parametric formula for aggregating microeconomic shocks in general equilibrium economies with distortions such as taxes, markups, frictions to resource reallocation, and nominal rigidities. We show that the macroeconomic impact of a shock can be boiled down into two components: its “pure” technology effect; and its effect on allocative efficiency arising from the reallocation of resources, which can be measured via changes in factor income shares. We derive a formula showing how these two components are determined by structural microeconomic parameters such as elasticities of substitution, returns to scale, factor mobility, and network linkages. Overall, our results generalize those of Solow (1957) and Hulten (1978) to economies with distortions. As examples, we pursue some applications focusing on markup distortions. We operationalize our non-parametric results and show that improvements in allocative efficiency account for about 50% of measured TFP growth over the period 1997-2015. We implement our structural results and conclude that eliminating markups would raise TFP by about 20%, increasing the economy-wide cost of monopoly distortions by two orders of magnitude compared to the famous 0.1% estimate by Harberger (1954).

JEL-codes: D24 D33 D42 D43 D5 D50 D57 D61 E01 E1 E25 E52 O4 O41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2017-11
Note: EFG
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Related works:
Working Paper: Productivity and Misallocation in General Equilibrium (2018) Downloads
Working Paper: Productivity and Misallocation in General Equilibrium (2017) Downloads
Working Paper: Productivity and Misallocation in General Equilibrium (2017) Downloads
Working Paper: Productivity and misallocation in general equilibrium (2017) Downloads
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