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Why Does Misallocation Persist?

  • Abhijit V. Banerjee
  • Benjamin Moll

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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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
Contact details of provider: Web page: https://www.aeaweb.org/aej-macro
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  1. Suresh de Mel & David McKenzie & Christopher Woodruff, 2008. "Returns to Capital in Microenterprises: Evidence from a Field Experiment," The Quarterly Journal of Economics, MIT Press, vol. 123(4), pages 1329-1372, November.
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  9. 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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