IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/24199.html
   My bibliography  Save this paper

Misallocation Measures: The Distortion That Ate the Residual

Author

Listed:
  • John Haltiwanger
  • Robert Kulick
  • Chad Syverson

Abstract

A large literature on misallocation and productivity has arisen in recent years, with Hsieh and Klenow (2009; hereafter HK) as its standard empirical framework. The framework’s usefulness and theoretical founding make it a valuable starting point for analyzing misallocations. However, we show this approach is sensitive to model misspecification. The model’s mapping from observed production behaviors to misallocative wedges/distortions holds in a single theoretical case, with strict assumptions required on both the demand and supply sides. We demonstrate that applying the HK methodology when there is any deviation from these assumptions will mean “distortions” recovered from the data may not be signs of inefficiency. Rather, they may simply reflect demand shifts or movements of the firm along its marginal cost curve, quite possibly in profitable directions. The framework may then not just spuriously identify inefficiencies; it might be more likely to do so precisely for businesses better in some fundamental way than their competitors. Empirical tests in our data, which allow us to separate price and quantity and as such directly test the model’s assumptions, suggest the framework’s necessary conditions do not hold. We then extend the HK framework to allow for more general demand and supply structures to quantify the discrepancy between the framework and the data. We find substantial deviations, particularly on the demand side. Using a decomposition derived from our extended framework, we find that much of the variation in revenue-based TFP (the measure of distortions in HK) reflects the influence of demand shifts, either directly or through distortions correlated with those shifts. We furthermore show that under general conditions, the variance of revenue-based TFP is not a sufficient statistic for efficiency losses due to misallocation.

Suggested Citation

  • John Haltiwanger & Robert Kulick & Chad Syverson, 2018. "Misallocation Measures: The Distortion That Ate the Residual," NBER Working Papers 24199, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:24199
    Note: EFG IO PR
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w24199.pdf
    Download Restriction: no

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. J. David Brown & Gustavo A. Crespi & Leonardo Iacovone & Luca Marcolin, 2018. "Decomposing firm-level productivity growth and assessing its determinants: evidence from the Americas," The Journal of Technology Transfer, Springer, vol. 43(6), pages 1571-1606, December.
    2. Hengjie Ai & Anmol Bhandari & Chao Ying & Yuchen Chen, 2019. "Misallocation and risk sharing," 2019 Meeting Papers 1215, Society for Economic Dynamics.
    3. Lucia Foster & Cheryl Grim & John Haltiwanger & Zoltan Wolf, 2019. "Innovation, Productivity Dispersion, and Productivity Growth," NBER Chapters, in: Measuring and Accounting for Innovation in the 21st Century, National Bureau of Economic Research, Inc.
    4. Elías Albagli & Mario Canales & Antonio Martner & Matías Tapia & Juan M. Wlasiuk, 2019. "Misallocation or Misspecification? The Effect of “Average” Distortions on TFP Gains Estimations," Working Papers Central Bank of Chile 835, Central Bank of Chile.
    5. Ruochen Dai & Dilip Mookherjee & Kaivan Munshi & Xiaobo Zhang, 2019. "The Community Origins of Private Enterprise in China," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-320, Boston University - Department of Economics.
    6. repec:cpr:ceprdp:14114 is not listed on IDEAS
    7. Maurice Bun & Jasper de Winter, 2019. "Measuring trends and persistence in capital and labor misallocation," DNB Working Papers 639, Netherlands Central Bank, Research Department.

    More about this item

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D6 - Microeconomics - - Welfare Economics
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:24199. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: http://edirc.repec.org/data/nberrus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.