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Measuring Misallocation and Reallocation

Paper Session

Monday, Jan. 5, 2026 1:00 PM - 3:00 PM (EST)

Philadelphia Marriott Downtown, Room 309
Hosted By: Econometric Society
  • Chair: Kunal Sangani, Stanford University

Constrained Efficiency in a Dynamic Spatial Economy

Eric Donald
,
University of Pittsburgh
Masao Fukui
,
Boston University
Yuhei Miyauchi
,
Boston University

Abstract

We study constrained efficient allocation of dynamic spatial equilibrium models with frictional migration. The key constraint is that the location preference shocks are private information. We provide a recursive formula that the constrained efficient allocation must satisfy, summarizing the dynamic trade-off between providing consumption insurance and incentivizing efficient migration. We apply our framework to the U.S. states to study welfare gains from moving to the constrained efficient allocation from a status quo economy with exogenously incomplete market. In the steady state, we find that substantial welfare gains can be achieved not only by providing better insurance but also by reallocating population toward more productive states through dynamic contracts. Along the transition in response to localized productivity shocks, the constrained efficient allocation involves more population reallocation in the short-run and less reallocation in the long-run, relative to the status-quo economy with exogenously incomplete market. Despite the economy subject to information frictions, welfare effects of disaggregated productivity shocks can be evaluated in the same way as the first-best economy with complete information.

Sectoral Shocks and Labor Market Dynamics: A Sufficient Statistics Approach

Ryungha Oh
,
University of Chicago
Jaeeun Seo
,
University of Illinois-Urbana-Champaign

Abstract

In this paper, we develop a sufficient statistics approach to evaluate the impact of sectoral shocks on labor market dynamics and welfare. Within a broad class of dynamic discrete choice models that allows for arbitrary persistent heterogeneity across workers, we show that knowledge of steady-state intersectoral worker flows over various time horizons is sufficient to evaluate labor supply responses to shocks as well as their aggregate welfare consequences. We also establish analytically that assuming away persistent worker heterogeneity—a common practice in the literature—necessarily leads to overestimation of steady-state worker flows, resulting in systematic biases in counterfactual predictions. As an illustration of our sufficient statistics approach, we revisit the consequences of the rise of import competition from China. Using US panel data to measure steady-state worker flows, we conclude that labor reallocation from manufacturing to non-manufacturing is significantly slower, and the negative welfare effects on manufacturing workers are much more severe than those predicted by earlier models without persistent worker heterogeneity.

Quotas in General Equilibrium

David Baqaee
,
University of California-Los Angeles
Kunal Sangani
,
Stanford University

Abstract

We analyze economies with quotas and other quantity-based distortions. We show
that any feasible, distorted allocation of resources can be implemented as the competitive equilibrium of an economy with quotas. Unlike economies with wedges, economies with quotas are constrained efficient and thus satisfy macro-envelope conditions. This means that the effects of changes in technologies, distortions, or policies can be expressed in terms of a small set of sufficient statistics. We provide a non-parametric and nonlinear characterization of the effects of quota and productivity changes on aggregate output. We also calculate the costs of misallocation due to quotas. These costs are expressed in terms of the price elasticities of an inverse demand system capturing how quota prices respond to changes in quota levels. We illustrate our results using several examples: we estimate efficiency gains from increasing the cap on H-1B visas, relaxing zoning restrictions on single-family housing in American cities, removing capital controls in Argentina, phasing out U.S. quotas on Chinese clothing and textiles, and eliminating the taxicab medallion system in New York City. Our results offer a flexible method for quantifying the costs of quota distortions and the effects of policy reforms across these settings.

IneQuality

Gideon Bornstein
,
University of Pennsylvania
Alessandra Peter
,
New York University

Abstract

This paper studies how income inequality shapes consumption inequality when firms endogenously choose their product portfolios. We develop a general equilibrium model with heterogeneous firms that choose the quality of their products and compete both across firms and within their own product lines. We show that income inequality leads high-market-power firms to distort the quality distribution of their products, either by downgrading or removing lower-end products, to avoid cannibalizing sales of high-end ones. Such cannibalization concern does not a�ffect product choices of low-market-power firms. Overall, the rise in consumption inequality exceeds that of income inequality. An implication of the model is that a rise in market power has distributional consequences—welfare losses are larger for low-income households.
JEL Classifications
  • E0 - General