Micro-level Misallocation and Selection
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Mu-Jeung Yang
- American Economic Journal: Macroeconomics (Forthcoming)
Abstract
How large are the aggregate productivity losses from the misallocation of resources across firms? With endogenous selection, micro-
frictions can induce extensive-margin misallocation among firms:
too many unproductive firms are active (Zombies) and too many
productive firms are inactive (Shadows). Therefore, the same set
of measured distortions potentially induces much larger aggregate
productivity losses, as the composition of firms is shifted towards
unproductive active firms. I develop and calibrate a model with
plant-level micro-data for Indonesia to quantify aggregate welfare
in the presence of extensive margin misallocation. My estimates
show that selection can magnify aggregate TFP losses from micro-distortions by over 40%, compared to existing estimates. Realistic
values of measurement error even increase the relative importance
of extensive margin misallocation.
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