What’s in a wedge? Misallocation and Taxation in the Oil Industry

Resource misallocation explains a large part of cross-country productivity differences. Although measuring gaps in marginal products of labor and capital across plants can quantify the extent of this misallocation, it cannot account for its source. We address this problem by using novel microdata from the oil industry (that includes information on taxation) to pin down both the extent and the source of misallocation in the rest-of-the-world versus the United States. We confirm the existence of sizeable gaps in marginal products across production units. However, once differences in direct taxation are accounted for, these gaps largely disappear. This provides strong evidence that gaps in marginal products - and hence productivity - are largely driven by differences in tax policies rather than more indirect distortions.