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Can land misallocation be a greater barrier to development than capital? Evidence from manufacturing firms in Sri Lanka

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  • Kumari, Ranpati Dewage Thilini Sumudu
  • Chen, Shawn Xiaoguang
  • Li, Bei
  • Tang, Sam Hak Kan

Abstract

We quantify cross-firm misallocation in land and compare it with that in capital. Misallocation arises when a production factor produces greater marginal revenue product (MRP) in some firms than in others because the former firms have to pay a higher shadow production factor price which is usually distorted by persistent institutional factors. Consequently, the aggregate total factor productivity (TFP) could be increased through cross-firm factor reallocation within an industry. Existing literature mainly emphasizes the misallocation in capital and labour, or in agricultural land. Little is done to quantify the misallocation of industrial land. By using annual-firm-level survey data from Sri Lanka's manufacturing sector over 1994–2015, we find that the aggregate TFP gain from reallocating land is about five times of that from capital. Further, we find that firms can hardly grow bigger due to size-dependent land distortion. The results suggest that land distortion can be a crucial barrier to development.

Suggested Citation

  • Kumari, Ranpati Dewage Thilini Sumudu & Chen, Shawn Xiaoguang & Li, Bei & Tang, Sam Hak Kan, 2023. "Can land misallocation be a greater barrier to development than capital? Evidence from manufacturing firms in Sri Lanka," Economic Modelling, Elsevier, vol. 126(C).
    • Handle: RePEc:eee:ecmode:v:126:y:2023:i:c:s0264999323001803
    DOI: 10.1016/j.econmod.2023.106368
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    More about this item

    Keywords

    Capital misallocation; Developing country; Firm-level distortion; Land misallocation; Sri Lanka; TFP;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East
    • Q15 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Land Ownership and Tenure; Land Reform; Land Use; Irrigation; Agriculture and Environment

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