Productivity and Misallocation During a Crisis

Ezra Oberfield

No 1328, 2011 Meeting Papers from Society for Economic Dynamics

Abstract: Measured total factor productivity often declines sharply during financial crises. In 1982, the Chilean manufacturing sector suffered a severe contraction in output, most of which can be accounted for a falling Solow residual. Using establishment data from the Chilean manufacturing census, I assess the contribution of misallocation to the drop in output. Using several measures, I find that the cross-sectional allocation of resources deteriorated during the crisis. To quantify the impact of this misallocation on aggregate measured TFP I develop a decomposition along the lines of Hsieh and Klenow (2009). The analysis allows for specifications that span two extremes: (i) all plants have identical factor intensities (ii) plants differ in factor intensities within each sector. While this raises difficult aggregation issues, I show the connection between changes in the extent of misallocation and changes in an aggregate Solow residual. Although the preliminary results are sensitive to the exact empirical specification, I find that increased misallocation had a substantial impact on aggregate total factor productivity during the crisis.

Date: 2011
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