Narrow Results

This paper enriches the misallocation literature by identifying the role of marketization based on China’s manufacturing database. We find that when the effect of misallocation on TFP dispersion is larger than that of market competition, the TFP dispersion of private enterprises tends to increase, misallocation decreases and market competition increases. However, as the dispersion of state-owned enterprises in China decreases, misallocation and market competition both increase.

This paper attempts to measure the effect of resource misallocation on aggregate manufacturing total factor productivity, focusing on Vietnamese manufacturing firms during the period 2000–2009. One of the major findings of this paper is that there would have been substantial improvement in aggregate total factor productivity in Viet Nam in the absence of distortions. The results imply that potential productivity gains from removing distortions in Vietnamese manufacturing are large. We also find that smaller firms tend to face advantageous distortions, while larger firms tend to face disadvantageous ones. Moreover, the efficient size distribution is more dispersed than the actual size distribution. These results suggest that Viet Nam's policies may constrain its largest and most efficient producers, and coddle its smallest and least efficient ones.

Using a database of 23,000 firms in 45 economies, we test the quantitative importance of access to finance and access to public and private credit for the determination of misallocation. We first derive measures of factor market and size distortions, and then use these measures within a regression framework to test the significance of self-declared access-to-finance obstacles as well as the effect of access to a credit line issued by either a government-owned or private bank. We find that access-to-finance obstacles and private credit increase the dispersion of distortions. Public credit has a very small effect. For firms that do not face financial obstacles, public credit increases the dispersion of distortions; for firms that face financial obstacles, it slightly decreases dispersion. Public credit does not appear to compensate for the distortions that exist in private credit markets. Quantitatively, however, financial variables explain a very small part of the dispersion of factor market and size distortions.

We construct a two-sector (agriculture and modern) overlapping generations growth model calibrated to India to study the effects of sectoral tax rates, sectoral infrastructure investments, and labor market frictions on potential growth in India. Our model is motivated by the idea that because misallocation depends on distortions, policies that reduce distortions raise potential growth. We show that the positive effect of a variety of policy reforms on potential growth depends on the extent to which public and private capital are complements or substitutes. We also show that funding more infrastructure investments in both sectors by raising labor income taxes in the agriculture sector raises potential growth.

It is well established that misallocation of factor resources lowers productivity. In this paper, I use data from both formal and informal firms to study distortions in input and output markets as sources of misallocation in the Indian manufacturing sector. My work extends the seminal work of Hsieh and Klenow (2009). I consider output, capital, raw material, energy, and service sector distortions in a monopolistically competitive framework to measure the aggregate dispersion in total factor revenue productivity (TFPR). I also decompose the variance in TFPR and show that raw material and output distortions play a major role in defining aggregate misallocation.