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Estimating Lost Output from Allocative Inefficiency, with an Application to Chile and Firing Costs

Author

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  • Amil Petrin

    (University of Minnesota and NBER)

  • Jagadeesh Sivadasan

    (University of Michigan)

Abstract

We propose a new measure of allocative efficiency based on unrealized increases in aggregate productivity growth. We show that the difference in the value of the marginal product of an input and its marginal cost at any plant—the plant-input gap—is exactly equal to the change in aggregate output that would occur if that plant changed that input's use by one unit. We show how to estimate this gap using plant-level data for 1982 to 1994 from Chilean manufacturing. We find the gaps for blue- and white-collar labor are quite large in absolute value, and these gaps (unlike for materials and electricity) are increasing over time. The timing of the sharpest increases in the labor gaps suggests that they may be related to increases in severance pay. © 2013 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Suggested Citation

  • Amil Petrin & Jagadeesh Sivadasan, 2013. "Estimating Lost Output from Allocative Inefficiency, with an Application to Chile and Firing Costs," The Review of Economics and Statistics, MIT Press, vol. 95(1), pages 286-301, March.
    • Handle: RePEc:tpr:restat:v:95:y:2013:i:1:p:286-301
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    Keywords

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    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • O54 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Latin America; Caribbean

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