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Factor Misallocation and Optimization in China’s Manufacturing Industry

Author

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  • Shuangjie Li

    (School of Economics and Management, Beijing University of Technology, Beijing 100124, China)

  • Huifang E

    (School of Economics and Management, Beijing University of Technology, Beijing 100124, China
    School of Statistics and Mathematics, Inner Mongolia University of Finance and Economics, Hohhot 010070, China)

  • Liming Wang

    (School of Economics and Management, Beijing University of Technology, Beijing 100124, China
    Irish Institute for Chinese Studies, University College Dublin, D04V1W8 Dublin, Ireland)

  • Huidan Xue

    (School of Economics and Management, Beijing University of Technology, Beijing 100124, China)

Abstract

Factor allocation has an important impact on production efficiency, and this study discusses factor misallocation and proposes an optimized method that could improve efficiency and reduce factor inputs. Under a multi-industry competitive equilibrium model, by introducing distortion tax that represents frictions on factor inputs (capital, labor, energy, and other intermediate consumption), we define factor price distortion indexes to measure factor misallocation and set the standardized comprehensive distortion index at the optimal value of one to obtain optimized allocation of each factor. Using actual and optimized inputs, we compute input-oriented efficiencies separately by employing a slack-based measurement data envelopment analysis (SBM-DEA). The superiority of the new allocation method is tested by comparing changes in efficiency and input redundancy before and after optimization. An empirical test based on China’s manufacturing sector during 1999–2016 shows that, under the optimized reallocation, on average, efficiency is improved by 43.40%, capital, labor, energy, and other intermediate consumption are reduced by 18.06%, 16.34%, 30.91%, and 31.24%, respectively, and the total carbon emission is reduced by 55.22% from 2000 to 2016. Our results imply that factor misallocation causes losses in efficiency and excessive input of factors, and factor allocation needs to be further optimized for sustainable development.

Suggested Citation

  • Shuangjie Li & Huifang E & Liming Wang & Huidan Xue, 2023. "Factor Misallocation and Optimization in China’s Manufacturing Industry," Sustainability, MDPI, vol. 15(5), pages 1-21, February.
    • Handle: RePEc:gam:jsusta:v:15:y:2023:i:5:p:4279-:d:1082698
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