Extracting Wedges: Misallocation and Taxation in the Oil Industry

How large are the productivity differences arising from micro-level distortions, and how much of that is due to tax policy? Using over a century of field-level data (1900-2023), this paper examines the role of field-level revenue taxes in explaining misallocation in the oil and gas industry, a single large sector that produces a homogeneous, globally-traded good. A key advantage is our ability to link model-implied distortions directly to these observed tax rates. We show that misallocation is significant in the oil industry, and that over half of this misallocation can be accounted for by the dispersion in revenue tax rates across fields, exceeding the 2-25% explanatory power typical in studies of misallocation sources. We show that nearly all of the impact of this tax dispersion operates through the intensive margin (the inputs allocated at a field) rather than the extensive margin (the choice to enter a field). These findings have direct implications for tax policy