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The Role of Allocative Efficiency in a Decade of Recovery

Author

Listed:
  • Kaiji Chen

    (Emory University)

  • Alfonso Irarrazabal

    (Norges Bank)

Abstract

The Chilean economy experienced a decade of sustained growth in aggregate output and productivity after the 1982 financial crisis. This paper analyzes the role of allocative efficiency on total factor productivity (TFP) in the manufacturing sector by applying the methodology of Hsieh and Klenow (2009) to establishment data from the Chilean manufacturing census. We find that a reduction in resource misallocation accounts for about 40 percent of the growth in manufacturing TFP between 1983 and 1996. In particular, a reduction in the least productive plants' implicit output subsidies is the primary reason for the reduction in resource misallocation during this period. Moreover, these plants enjoyed above industry-average growth in physical productivity, contributing to the overall improvement in efficient TFP after the financial crisis. Our evidence suggests that Chile's banking reform during the early and mid-1980s is likely to have played an important role in the observed improvement in allocative efficiency. (Copyright: Elsevier)

Suggested Citation

  • Kaiji Chen & Alfonso Irarrazabal, 2015. "The Role of Allocative Efficiency in a Decade of Recovery," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(3), pages 523-550, July.
  • Handle: RePEc:red:issued:13-61
    DOI: 10.1016/j.red.2014.09.008
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    Cited by:

    1. Manuel García-Santana & Enrique Moral-Benito & Josep Pijoan-Mas & Roberto Ramos, 2016. "Growing like Spain: 1995-2007," Economics Working Papers 1517, Department of Economics and Business, Universitat Pompeu Fabra.
    2. Diego Restuccia & Richard Rogerson, 2017. "The Causes and Costs of Misallocation," Journal of Economic Perspectives, American Economic Association, vol. 31(3), pages 151-174, Summer.
    3. Schelkle, Thomas, 2017. "Measuring Factor Misallocation: General Methods and Evidence on the Great Recession," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168105, Verein für Socialpolitik / German Economic Association.
    4. Daniel A Dias & Christine J. Richmond & Carlos Robalo Marques, 2016. "A Tale of Two Sectors; Why is Misallocation Higher in Services than in Manufacturing?," IMF Working Papers 16/220, International Monetary Fund.
    5. Sara Calligaris, 2015. "Misallocation and Total Factor Productivity in Italy: Evidence from Firm-Level Data," CEIS Research Paper 357, Tor Vergata University, CEIS, revised 14 Oct 2015.
    6. Stephen Ayerst, 2016. "Idiosyncratic Distortions and Technology Adoption," Working Papers tecipa-571, University of Toronto, Department of Economics.
    7. Sara Calligaris, 2015. "Misallocation and Total Factor Productivity in Italy: Evidence from Firm-Level Data," LABOUR, CEIS, vol. 29(4), pages 367-393, December.
    8. S. Calligaris & M. Del Gatto & F. Hassan & G. I.P. Ottaviano & F. Schivardi, 2017. "The Productivity Puzzle and Misallocation: an Italian Perspective," Working Paper CRENoS 201710, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
    9. Dias, Daniel A. & Robalo Marques, Carlos & Richmond, Christine, 2016. "Misallocation and productivity in the lead up to the Eurozone crisis," Journal of Macroeconomics, Elsevier, vol. 49(C), pages 46-70.
    10. repec:eee:proeco:v:193:y:2017:i:c:p:465-478 is not listed on IDEAS
    11. T. Libert, 2017. "Misallocation Before, During and After the Great Recession," Working papers 658, Banque de France.
    12. Thomas Schelkle, 2016. "General Methods for Measuring Factor Misallocation," Working Paper Series in Economics 87, University of Cologne, Department of Economics.

    More about this item

    Keywords

    Allocative efficiency; TFP; Banking reform; Preferential credit policy; Chile;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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