Misallocation and the Distribution of Global Volatility
American Economic Review
vol. 107,
no. 2, February 2017
(pp. 592-622)
Abstract
Decreasing returns at the macro level are an outcome of efficiency at the micro level. When inputs are scarce, an efficient economy carries out only the most productive projects; when inputs are abundant, the economy implements less productive projects as well. This link between decreasing returns and efficiency suggests that misallocation can reduce the extent of aggregate decreasing returns. I formalize this connection and establish two main results: (i) misallocation amplifies the volatility of output with respect to fluctuations in inputs; and (ii) financial integration amplifies shocks in relatively distorted economies, but mitigates them in less distorted economies.Citation
Eden, Maya. 2017. "Misallocation and the Distribution of Global Volatility." American Economic Review, 107 (2): 592-622. DOI: 10.1257/aer.20150314Additional Materials
JEL Classification
- D24 Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
- D82 Asymmetric and Private Information; Mechanism Design
- E23 Macroeconomics: Production
- E32 Business Fluctuations; Cycles
- E44 Financial Markets and the Macroeconomy
- F41 Open Economy Macroeconomics