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Why Does Misallocation Persist?

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  • Abhijit V. Banerjee
  • Benjamin Moll

Abstract

Recent papers argue that the misallocation of resources can explain large cross-country TFP differences. This argument is underpinned by empirical evidence documenting substantial dispersion in the marginal products of resources, particularly capital, in developing countries. But why does misallocation persists? That is, why don't distortions disappear on their own? This is particularly true for capital misallocation, a point we illustrate in a simple model of capital accumulation with credit constraints. We distinguish between misallocation on the intensive and the extensive margin, and show that the former should disappear asymptotically under general conditions, while the latter may persist. We conclude by discussing possible theories of persistent misallocation. (JEL D24, E22, G31, G32, L26)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/mac.2.1.189
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Journal: Macroeconomics.

Volume (Year): 2 (2010)
Issue (Month): 1 (January)
Pages: 189-206

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Handle: RePEc:aea:aejmac:v:2:y:2010:i:1:p:189-206

Note: DOI: 10.1257/mac.2.1.189
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References

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  1. Hyeok Jeong & Robert M. Townsend, 2005. "Sources of TFP Growth: Occupational Choice and Financial Deepening," IEPR Working Papers 05.28, Institute of Economic Policy Research (IEPR), revised May 2005.
  2. Oded Galor & Joseph Zeira, 2013. "Income Distribution and Macroeconomics," Working Papers 2013-12, Brown University, Department of Economics.
  3. Laura Alfaro & Andrew Charlton & Fabio Kanczuk, 2009. "Plant-Size Distribution and Cross-Country Income Differences," NBER Chapters, in: NBER International Seminar on Macroeconomics 2008, pages 243-272 National Bureau of Economic Research, Inc.
  4. Roger Gordon & Wei Li, 2005. "Tax Structure in Developing Countries: Many Puzzles and a Possible Explanation," NBER Working Papers 11267, National Bureau of Economic Research, Inc.
  5. Christopher Udry & Santosh Anagol, 2006. "The Return to Capital in Ghana," American Economic Review, American Economic Association, vol. 96(2), pages 388-393, May.
  6. Francesco Caselli & Nicola Gennaioli, 2003. "Dynastic Management," NBER Working Papers 9442, National Bureau of Economic Research, Inc.
  7. de Mel, Suresh & McKenzie, David & Woodruff, Christopher, 2007. "Returns to capital in microenterprises : evidence from a field experiment," Policy Research Working Paper Series 4230, The World Bank.
  8. Benjamin Moll, 2009. "Creditor Rights, Inequality and Development in a Neoclassical Growth Model," 2009 Meeting Papers 1168, Society for Economic Dynamics.
  9. Yongseok Shin & Joe Kaboski & Francisco J. Buera, 2008. "Finance and Development: A Tale of Two Sectors," 2008 Meeting Papers 955, Society for Economic Dynamics.
  10. Skiba, A K, 1978. "Optimal Growth with a Convex-Concave Production Function," Econometrica, Econometric Society, vol. 46(3), pages 527-39, May.
  11. Dechert, W. Davis & Nishimura, Kazuo, 1983. "A complete characterization of optimal growth paths in an aggregated model with a non-concave production function," Journal of Economic Theory, Elsevier, vol. 31(2), pages 332-354, December.
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Citations

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Cited by:
  1. Jonas Hjort, 2013. "Ethnic Divisions and Production in Firms," CESifo Working Paper Series 4449, CESifo Group Munich.
  2. Sebnem Kalemli-Ozcan & Bent E. Sorensen, 2012. "Misallocation, Property Rights, and Access to Finance: Evidence from Within and Across Africa," NBER Working Papers 18030, National Bureau of Economic Research, Inc.
  3. Diego Restuccia & Richard Rogerson, 2013. "Misallocation and productivity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(1), pages 1-10, January.
  4. Bhattacharyya, Nikhilesh, 2012. "Monetary policy and employment in developing Asia," ILO Working Papers 468522, International Labour Organization.
  5. Pozzi, Andrea & Schivardi, Fabiano, 2012. "Demand or productivity: What determines firm growth?," CEPR Discussion Papers 9184, C.E.P.R. Discussion Papers.
  6. Pedro J. Martínez Alanis, 2012. "Distorsiones regionales en la asignación de recursos y productividad de las manufacturas en México," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 27(1), pages 3-59.
  7. Nguimkeu, Pierre, 2014. "A structural econometric analysis of the informal sector heterogeneity," Journal of Development Economics, Elsevier, vol. 107(C), pages 175-191.
  8. Modalsli, Jørgen Heibø, 2011. "Polarization, Risk and Welfare in General Equilibrium," Memorandum 27/2011, Oslo University, Department of Economics.
  9. Heibø Modalsli, Jørgen, 2011. "Solow meets Marx: Economic growth and the emergence of social class," Memorandum 21/2011, Oslo University, Department of Economics.
  10. Curuk, M., 2012. "Trade, Technology Diffusion and Misallocation: Trade Partner Matters (Replaces CentER DP 2011-125)," Discussion Paper 2012-046, Tilburg University, Center for Economic Research.
  11. Yuichiro Matsumoto, 2014. "Inverted u-shaped relationship between inequality and economic performance," Discussion Papers in Economics and Business 14-19, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  12. Shah, Ajay & Patnaik, Ila, 2011. "Reforming the Indian financial system," Working Papers 11/80, National Institute of Public Finance and Policy.
  13. Michael Peters, 2013. "Heterogeneous mark-ups, growth and endogenous misallocation," LSE Research Online Documents on Economics 54254, London School of Economics and Political Science, LSE Library.
  14. Lee, Sang Yoon Tim, 2012. "Entrepreneurs, Managers and Inequality," Working Papers 12-15, University of Mannheim, Department of Economics.
  15. Uras, Burak R., 2014. "Corporate financial structure, misallocation and total factor productivity," Journal of Banking & Finance, Elsevier, vol. 39(C), pages 177-191.
  16. Thomas Gall & Paolo Masella, 2012. "Markets and jungles," Journal of Economic Growth, Springer, vol. 17(2), pages 103-141, June.
  17. Curuk, M., 2011. "The Effects of International Trade on Resource Misallocation: Trade Partner Matters (Replaced by CentER DP 2012-046)," Discussion Paper 2011-125, Tilburg University, Center for Economic Research.
  18. Benjamin Moll, 2009. "Creditor Rights, Inequality and Development in a Neoclassical Growth Model," 2009 Meeting Papers 1168, Society for Economic Dynamics.

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