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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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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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  1. 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.
  2. Robert M. Townsend & Hyeok Jeong, 2007. "Sources of TFP Growth: Occupational Choice and Financial Deepening," 2007 Meeting Papers, Society for Economic Dynamics 198, Society for Economic Dynamics.
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  7. Oded Galor & Joseph Zeira, 2013. "Income Distribution and Macroeconomics," Working Papers 2013-12, Brown University, Department of Economics.
  8. Caselli, Francesco & Gennaioli, Nicola, 2003. "Dynastic Management," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3767, C.E.P.R. Discussion Papers.
  9. Francisco J. Buera & Joseph P. Kaboski & Yongseok Shin, 2011. "Finance and Development: A Tale of Two Sectors," American Economic Review, American Economic Association, American Economic Association, vol. 101(5), pages 1964-2002, August.
  10. Benjamin Moll, 2009. "Creditor Rights, Inequality and Development in a Neoclassical Growth Model," 2009 Meeting Papers, Society for Economic Dynamics 1168, Society for Economic Dynamics.
  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, Elsevier, vol. 31(2), pages 332-354, December.
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