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Mark-Up Distortions and Endogenous Misallocation

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  • Michael Peters

    (MIT)

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    Abstract

    Income differences across countries are to a large degree driven by differences in aggregate TFP. Recently it has been argued that part of these differences are due to misallocation of factor across firms. In this paper we propose a structural model of this degree of misallocation. Our model is one where monopolistic competition across firms generates non-constant mark-ups, which reduce aggregate TFP relative to the competitive benchmark. Equilibrium mark-ups depend only on the distribution of firm-level productivity, which evolves endogenously according to a Schumpeterian process of creative destruction. This provides the link between the economy's innovation environment and the equilibrium degree of misallocation. In particular, the economy's entry intensity is a sufficient statistic for the invariant distribution of mark-ups and their TFP consequences. If entry is more intense, aggregate TFP is higher, as product market competition reduces the distorting effect of mark-ups. This provides a new channel how impediments to firm entry, like entry costs, reduce allocative efficiency, aggregate TFP and income per capita.

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    Bibliographic Info

    Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 431.

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    Date of creation: 2010
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    Handle: RePEc:red:sed010:431

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    1. Levon Barseghyan, 2008. "Entry costs and cross-country differences in productivity and output," Journal of Economic Growth, Springer, vol. 13(2), pages 145-167, June.
    2. Acemoglu, Daron & Antras, Pol & Helpman, Elhanan, 2007. "Contracts and Technology Adoption," Scholarly Articles 3199063, Harvard University Department of Economics.
    3. Andrew B. Bernard & Jonathan Eaton & J. Bradford Jensen & Samuel Kortum, 2000. "Plants and Productivity in International Trade," Boston University - Institute for Economic Development 105, Boston University, Institute for Economic Development.
    4. Virgiliu Midrigan & Daniel Yi Xu, 2010. "Finance and Misallocation: Evidence from Plant-level Data," NBER Working Papers 15647, National Bureau of Economic Research, Inc.
    5. Chang-Tai Hsieh & Peter J. Klenow, 2007. "Misallocation and Manufacturing TFP in China and India," NBER Working Papers 13290, National Bureau of Economic Research, Inc.
    6. Francisco J. Buera & Joseph Kaboski & Yongseok Shin, 2009. "Finance and Development: A Tale of Two Sectors," NBER Working Papers 14914, National Bureau of Economic Research, Inc.
    7. Riccardo DiCecio & Levon Barseghayn, 2009. "Entry Costs, Misallocation, and Cross-Country Income and TFP Differences," 2009 Meeting Papers 428, Society for Economic Dynamics.
    8. 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.
    9. Fabrizio Zilibotti & Gino Gancia, 2009. "Technological Change and the Wealth of Nations," 2009 Meeting Papers 499, Society for Economic Dynamics.
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