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


  • Amil Petrin

    (University of Minnesota and NBER)

  • Jagadeesh Sivadasan

    (University of Michigan)


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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    References listed on IDEAS

    1. James J. Heckman & Carmen Pagés, 2004. "Law and Employment: Lessons from Latin America and the Caribbean," NBER Books, National Bureau of Economic Research, Inc, number heck04-1, January.
    2. Hartley, Gonzalo Reyes & van Ours, Jan C. & Vodopivec, Milan, 2011. "Incentive effects of unemployment insurance savings accounts: Evidence from Chile," Labour Economics, Elsevier, vol. 18(6), pages 798-809.
    3. Amil Petrin & Jagadeesh Sivadasan, 2006. "Job Security Does Affect Economic Efficiency: Theory, A New Statistic, and Evidence from Chile," NBER Working Papers 12757, National Bureau of Economic Research, Inc.
    4. Samuel Bentolila & Giuseppe Bertola, 1990. "Firing Costs and Labour Demand: How Bad is Eurosclerosis?," Review of Economic Studies, Oxford University Press, vol. 57(3), pages 381-402.
    5. Alvarez, Fernando & Veracierto, Marcelo, 2001. "Severance payments in an economy with frictions," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 477-498, June.
    6. John M. Abowd & Bryce E. Stephens & Lars Vilhuber & Fredrik Andersson & Kevin L. McKinney & Marc Roemer & Simon Woodcock, 2009. "The LEHD Infrastructure Files and the Creation of the Quarterly Workforce Indicators," NBER Chapters,in: Producer Dynamics: New Evidence from Micro Data, pages 149-230 National Bureau of Economic Research, Inc.
    7. Lucia Foster & John C. Haltiwanger & C. J. Krizan, 2001. "Aggregate Productivity Growth: Lessons from Microeconomic Evidence," NBER Chapters,in: New Developments in Productivity Analysis, pages 303-372 National Bureau of Economic Research, Inc.
    8. Sebastian Edwards & Alejandra Cox Edwards, 2000. "Economic reforms and labour markets: policy issues and lessons from Chile," Economic Policy, CEPR;CES;MSH, vol. 15(30), pages 181-230, April.
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    Cited by:

    1. Andrea Pozzi & Fabiano Schivardi, 2016. "Demand or productivity: what determines firm growth?," RAND Journal of Economics, RAND Corporation, vol. 47(3), pages 608-630, August.
    2. Stefano Visintin & Alessandro Gentile, 2013. "Il mercato del lavoro in spagna: criticità e riforme strutturali in un contesto di crisi economica," ECONOMIA E SOCIETÀ REGIONALE, FrancoAngeli Editore, vol. 2013(2), pages 65-85.
    3. Luis Garicano & Claire Lelarge & John Van Reenen, 2016. "Firm Size Distortions and the Productivity Distribution: Evidence from France," American Economic Review, American Economic Association, vol. 106(11), pages 3439-3479, November.
    4. Ezra Oberfield, 2013. "Productivity and Misallocation During a Crisis: Evidence from the Chilean Crisis of 1982," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(1), pages 100-119, January.
    5. Jürgen Bitzer & Erkan Gören & Sanne Hiller, 2015. "Absorption of Foreign Knowledge: Firms’ Benefits of Employing Immigrants," Working Papers V-386-15, University of Oldenburg, Department of Economics, revised Oct 2015.
    6. Sabien Dobbelaere & Rodolfo Lauterbach & Jacques Mairesse, 2016. "Micro-evidence on product and labor market regime differences between Chile and France," International Journal of Manpower, Emerald Group Publishing, vol. 37(2), pages 229-252, May.
    7. Almeida, Rita K. & Corseuil, Carlos Henrique & Poole, Jennifer P., 2017. "The Impact of Digital Technologies on Worker Tasks: Do Labor Policies Matter?," IZA Discussion Papers 11151, Institute for the Study of Labor (IZA).
    8. Shenoy, Ajay, 2017. "Market failures and misallocation," Journal of Development Economics, Elsevier, vol. 128(C), pages 65-80.
    9. Gamberoni, Elisa & Giordano, Claire & Lopez-Garcia, Paloma, 2016. "Capital and labour (mis)allocation in the euro area: some stylized facts and determinants," Working Paper Series 1981, European Central Bank.
    10. Andrea Linarello, 2014. "Trade liberalization and domestic suppliers: evidence from Chile," Temi di discussione (Economic working papers) 994, Bank of Italy, Economic Research and International Relations Area.
    11. Dobbelaere, Sabien & Kiyota, Kozo & Mairesse, Jacques, 2015. "Product and labor market imperfections and scale economies: Micro-evidence on France, Japan and the Netherlands," Journal of Comparative Economics, Elsevier, vol. 43(2), pages 290-322.
    12. Llosa, Luis-Gonzalo, 2013. "How Do Terms of Trade Affect Productivity? The Role of Monopolistic Output Markets," Working Papers 2013-007, Banco Central de Reserva del Perú.
    13. Lionel Fontagné & Gianluca Santoni, 2015. "Firm Level Allocative Inefficiency: Evidence from France," Working Papers 2015-12, CEPII research center.
    14. Mitsukuni Nishida & Amil Petrin & Sašo Polanec, 2014. "Exploring reallocation’s apparent weak contribution to growth," Journal of Productivity Analysis, Springer, vol. 42(2), pages 187-210, October.
    15. Almeida, Rita K. & Poole, Jennifer P., 2017. "Trade and labor reallocation with heterogeneous enforcement of labor regulations," Journal of Development Economics, Elsevier, vol. 126(C), pages 154-166.
    16. Norman Gemmell & Richard Kneller & Danny McGowan & Ismael Sanz, "undated". "Corporate Taxation and Productivity Catch-Up: Evidence from 11 European Countries," Discussion Papers 12/06, University of Nottingham, School of Economics.
    17. Dai, Xiaoyong & Cheng, Liwei, 2016. "Market distortions and aggregate productivity: Evidence from Chinese energy enterprises," Energy Policy, Elsevier, vol. 95(C), pages 304-313.
    18. Sabien Dobbelaere & Mark Vancauteren, 2014. "Market imperfections, skills and total factor productivity : Firm-level evidence on Belgium and the Netherlands," Working Paper Research 267, National Bank of Belgium.
    19. Hiroko Okudaira, 2009. "The Economic Costs of Court Decisions Concerning Dismissals in Japan: Identification by Judge Transfers," ISER Discussion Paper 0733r, Institute of Social and Economic Research, Osaka University, revised Sep 2015.
    20. repec:hal:wpaper:hal-01299818 is not listed on IDEAS
    21. González, Xulia & Miles-Touya, Daniel, 2012. "Labor market rigidities and economic efficiency: Evidence from Spain," Labour Economics, Elsevier, vol. 19(6), pages 833-845.
    22. Magnus Henrekson, 2014. "How labor market institutions affect job creation and productivity growth," IZA World of Labor, Institute for the Study of Labor (IZA), pages 1-38, May.
    23. Mitsukuni Nishida & Amil Petrin & Sašo Polanec, 2011. "Estimating Explaining Reallocation's Apparent Negative Contribution to Growth," Economics Working Paper Archive 584, The Johns Hopkins University,Department of Economics.
    24. Hyytinen, Ari & Maliranta, Mika, 2011. "Firm Lifecycles and External Restructuring," Discussion Papers 1253, The Research Institute of the Finnish Economy.
    25. Rita K. Almeida & Carlos H. L, Corseuil & Jennifer Poole, 2017. "The Impact of Digital Technologies on Worker Tasks: Do Labor Policies Matter?," CESifo Working Paper Series 6798, CESifo Group Munich.

    More about this item


    allocative efficiency; manufacturing; Chile;

    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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