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Mark-Up Distortions and Endogenous Misallocation


  • Michael Peters



Income differences across countries are to a large degree driven by differences in aggregate TFP. Recently it has been argued that part of these differences are due to misallocation of factor across firms. In this paper we propose a structural model of this degree of misallocation. Our model is one where monopolistic competition across firms generates non-constant mark-ups, which reduce aggregate TFP relative to the competitive benchmark. Equilibrium mark-ups depend only on the distribution of firm-level productivity, which evolves endogenously according to a Schumpeterian process of creative destruction. This provides the link between the economy's innovation environment and the equilibrium degree of misallocation. In particular, the economy's entry intensity is a sufficient statistic for the invariant distribution of mark-ups and their TFP consequences. If entry is more intense, aggregate TFP is higher, as product market competition reduces the distorting effect of mark-ups. This provides a new channel how impediments to firm entry, like entry costs, reduce allocative efficiency, aggregate TFP and income per capita.

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  • Michael Peters, 2010. "Mark-Up Distortions and Endogenous Misallocation," 2010 Meeting Papers 431, Society for Economic Dynamics.
  • Handle: RePEc:red:sed010:431

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    References listed on IDEAS

    1. Ricardo Lagos, 2006. "A Model of TFP," Review of Economic Studies, Oxford University Press, vol. 73(4), pages 983-1007.
    2. Diego Restuccia & Richard Rogerson, 2008. "Policy Distortions and Aggregate Productivity with Heterogeneous Plants," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(4), pages 707-720, October.
    3. Eric Bartelsman & John Haltiwanger & Stefano Scarpetta, 2013. "Cross-Country Differences in Productivity: The Role of Allocation and Selection," American Economic Review, American Economic Association, vol. 103(1), pages 305-334, February.
    4. Francisco J. Buera & Joseph P. Kaboski & Yongseok Shin, 2011. "Finance and Development: A Tale of Two Sectors," American Economic Review, American Economic Association, vol. 101(5), pages 1964-2002, August.
    5. Peter Klenow & Andrés Rodríguez-Clare, 1997. "The Neoclassical Revival in Growth Economics: Has It Gone Too Far?," NBER Chapters,in: NBER Macroeconomics Annual 1997, Volume 12, pages 73-114 National Bureau of Economic Research, Inc.
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