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Market Failures and Misallocation

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  • Shenoy, Ajay

Abstract

I develop a method to measure and separate the production misallocation caused by failures in factor markets versus financial markets. When I apply the method to rice farming villages in Thailand I find surprisingly little misallocation. Optimal reallocation would increase output in most villages by less than 15 percent. By 2006 most misallocation comes from factor market failures. I derive a decomposition of aggregate growth that accounts for misallocation. Declining misallocation contributes little to growth compared to factor accumulation and rising farm productivity. I use a government credit intervention to test my measures. I confirm that credit causes a statistically significant decrease in only financial market misallocation.

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  • Shenoy, Ajay, 2015. "Market Failures and Misallocation," Santa Cruz Department of Economics, Working Paper Series qt8m27w1r7, Department of Economics, UC Santa Cruz.
    • Handle: RePEc:cdl:ucscec:qt8m27w1r7
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