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Wedges: A Microeconomic Perspective on Misallocation

Author

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  • Lauren Falcao Bergquist

    (Yale University)

  • Danial Lashkari

    (New York Federal Reserve Bank)

  • Eric Verhoogen

    (Columbia University)

Abstract

This chapter, prepared for the Handbook of Development Economics (Vol. 6), reviews recent microeconomic evidence on the causes of resource misallocation in developing countries. It distinguishes between ÒtechnologicalÓ and ÒdistortionaryÓ wedges, develops a unified theoretical framework linking market power, taxes, financial frictions, and firm dynamics, and summarizes empirical findings from the Òdirect approachÓ to misallocation. The authors emphasize how wedges vary by firm size and discuss policy implications for improving allocative efficiency.

Suggested Citation

  • Lauren Falcao Bergquist & Danial Lashkari & Eric Verhoogen, 2026. "Wedges: A Microeconomic Perspective on Misallocation," Cowles Foundation Discussion Papers 2482, Cowles Foundation for Research in Economics, Yale University.
    • Handle: RePEc:cwl:cwldpp:2482
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    File URL: https://cowles.yale.edu/sites/default/files/2026-01/d2482.pdf
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