Resource misallocation and the development of hydropower industry

This paper analyzes the issue of improving total factor productivity (TFP) in the hydropower industry from the perspective of resource allocation and the role of market segmentation. Specifically, we decompose the loss of TFP into capital distortion and output distortion, finding that the potential production improvement of the southwestern region is higher than that in eastern and mid-southern China, which further indicating that hydropower plants in the hydro-endowed region face more severe input distortions. Meanwhile, small hydropower plants face more severe output distortions than medium and large plants. We apply the difference-in-differences approach to further examine the effect of market segmentation on aggregate productivity. The results show that market segmentation aggravates the input distortions of hydropower plants, and China’s Energy Saving Power Dispatch Approach policy has significant heterogeneous effects on mitigating the input distortions. Our detailed micro-level analysis sheds lights on the investigation of policy design in the renewable sector and the implications found can potentially be extended to other countries.