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A Tale of Two Sectors: Why is Misallocation Higher in Services than in Manufacturing?

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  • Daniel A. Dias
  • Carlos Robalo Marques
  • Christine Richmond

Abstract

Recent empirical studies document that the level of resource misallocation in the service sector is significantly higher than in the manufacturing sector. We quantify the importance of this difference and study its sources. Conservative estimates for Portugal in 2008 show that closing this gap, by reducing misallocation in the service sector to manufacturing levels, would boost aggregate gross output by around 12 percent and aggregate value added by around 31 percent. Differences in the effect and size of productivity shocks explain most of the gap in misallocation between manufacturing and services, while the remainder is explained by differences in firm productivity and age distributions. We interpret these results as stemming mainly from higher output‐price rigidity, higher labor adjustment costs and higher informality in the service sector.

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  • Daniel A. Dias & Carlos Robalo Marques & Christine Richmond, 2020. "A Tale of Two Sectors: Why is Misallocation Higher in Services than in Manufacturing?," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 66(2), pages 361-393, June.
    • Handle: RePEc:bla:revinw:v:66:y:2020:i:2:p:361-393
    DOI: 10.1111/roiw.12416
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    4. Alimov, Behzod, 2019. "Private debt, public debt, and capital misallocation," IWH-CompNet Discussion Papers 7/2019, Halle Institute for Economic Research (IWH).
    5. Ranasinghe, Ashantha, 2024. "Misallocation across establishment gender," Journal of Comparative Economics, Elsevier, vol. 52(1), pages 183-206.
    6. Florian Misch & Christian Saborowski, 2018. "Resource Misallocation and Productivity: Evidence from Mexico," IMF Working Papers 2018/112, International Monetary Fund.
    7. Konstantins Benkovskis, 2018. "Misallocation, productivity and fragmentation of production: the case of Latvia," Journal of Productivity Analysis, Springer, vol. 49(2), pages 187-206, June.
    8. Jeremy Kronick & Steve Ambler, 2019. "Do demographics affect monetary policy transmission in Canada?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 24(2), pages 787-811, April.
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    More about this item

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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