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Mark-Up Distortions and Endogenous Misallocation

  • Michael Peters

    (MIT)

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    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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    File URL: https://www.economicdynamics.org/meetpapers/2010/paper_431.pdf
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    Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 431.

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    Date of creation: 2010
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    Handle: RePEc:red:sed010:431
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    1. Chang-Tai Hsieh & Peter J. Klenow, 2009. "Misallocation and Manufacturing TFP in China and India," The Quarterly Journal of Economics, MIT Press, vol. 124(4), pages 1403-1448, November.
    2. Gino Gancia & Fabrizio Zilibotti, 2008. "Technological change and the wealth of nations," Economics Working Papers 1125, Department of Economics and Business, Universitat Pompeu Fabra.
    3. Daron Acemoglu & Pol AntrĂ s & Elhanan Helpman, 2007. "Contracts and Technology Adoption," American Economic Review, American Economic Association, vol. 97(3), pages 916-943, June.
    4. Virgiliu Midrigan & Daniel Yi Xu, 2010. "Finance and Misallocation: Evidence from Plant-level Data," NBER Working Papers 15647, National Bureau of Economic Research, Inc.
    5. Andrew B. Bernard & Jonathan Eaton & J. Bradford Jensen & Samuel Kortum, 2003. "Plants and Productivity in International Trade," American Economic Review, American Economic Association, vol. 93(4), pages 1268-1290, September.
    6. Yongseok Shin & Joe Kaboski & Francisco J. Buera, 2008. "Finance and Development: A Tale of Two Sectors," 2008 Meeting Papers 955, Society for Economic Dynamics.
    7. Levon Barseghyan, 2008. "Entry costs and cross-country differences in productivity and output," Journal of Economic Growth, Springer, vol. 13(2), pages 145-167, June.
    8. Levon Barseghyan & Riccardo DiCecio, 2009. "Entry costs, misallocation, and cross-country income and TFP differences," Working Papers 2009-005, Federal Reserve Bank of St. Louis.
    9. Laura Alfaro & Andrew Charlton & Fabio Kanczuk, 2009. "Plant-Size Distribution and Cross-Country Income Differences," NBER Chapters, in: NBER International Seminar on Macroeconomics 2008, pages 243-272 National Bureau of Economic Research, Inc.
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