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Misallocating misallocation?

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  • Ghatak, Maitreesh
  • Mookherjee, Dilip

Abstract

The macrodevelopment literature on misallocation quantifies aggregate productivity losses resulting from microeconomic distortions, relative to a first-best benchmark. However, sources of these distortions are often insufficiently explored. The microdevelopment literature in contrast provides evidence of distortions resulting from market failures owing to asymmetric information, missing markets, transaction costs, and limited state capacity, often without examining the resulting macrolevel consequences. If distortions result from such market failures rather than policies, second-best welfare-improving policies may aggravate productive misallocation. We illustrate these points in the context of manufacturing, agriculture, and rural-urban allocation of labor and land. Hence future research should devote more effort to identifying the source of distortions and using appropriate benchmarks for welfare going beyond productivity.

Suggested Citation

  • Ghatak, Maitreesh & Mookherjee, Dilip, 2025. "Misallocating misallocation?," LSE Research Online Documents on Economics 128208, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:128208
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    File URL: http://eprints.lse.ac.uk/128208/
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    Keywords

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    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • Q15 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Land Ownership and Tenure; Land Reform; Land Use; Irrigation; Agriculture and Environment

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