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The role of returns to scale in measuring frictions in resource allocation: Revisiting misallocation and manufacturing TFP in China

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  • Gong, Guan
  • Hu, Guanliang

Abstract

This paper extends the study by Hsieh and Klenow (2009) on productivity implication of resource misallocation by relaxing the assumption of constant returns to scale (CRS) for differentiated products. We show that when the CRS assumption fails, measuring frictions in resource allocation by variation in revenue productivity, as proposed by Hsieh and Klenow (2009), overestimates the resource misallocation in China.

Suggested Citation

  • Gong, Guan & Hu, Guanliang, 2016. "The role of returns to scale in measuring frictions in resource allocation: Revisiting misallocation and manufacturing TFP in China," Economics Letters, Elsevier, vol. 138(C), pages 26-29.
    • Handle: RePEc:eee:ecolet:v:138:y:2016:i:c:p:26-29
    DOI: 10.1016/j.econlet.2015.11.014
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    References listed on IDEAS

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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, President and Fellows of Harvard College, vol. 124(4), pages 1403-1448.
    2. Robert C. Feenstra & Zhiyuan Li & Miaojie Yu, 2014. "Exports and Credit Constraints under Incomplete Information: Theory and Evidence from China," The Review of Economics and Statistics, MIT Press, vol. 96(4), pages 729-744, October.
    3. James Levinsohn & Amil Petrin, 2003. "Estimating Production Functions Using Inputs to Control for Unobservables," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(2), pages 317-341.
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    Citations

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    Cited by:

    1. Yidan Liang, 2023. "Capital and labour distortion in China: a systematic literature review using HistCite," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(2), pages 1759-1784, June.
    2. 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).
    3. Weng, Liying & Xu, Changsheng & Yi, Ming, 2024. "Resource misallocation in China: Biased subsidies versus credit discrimination," Economic Modelling, Elsevier, vol. 134(C).
    4. Yang, Mian & Yang, Fuxia & Sun, Chuanwang, 2018. "Factor market distortion correction, resource reallocation and potential productivity gains: An empirical study on China's heavy industry sector," Energy Economics, Elsevier, vol. 69(C), pages 270-279.
    5. Chen, Shawn Xiaoguang, 2017. "VAT rate dispersion and TFP loss in China’s manufacturing sector," Economics Letters, Elsevier, vol. 155(C), pages 49-54.
    6. Liu, Yajie & Cui, Lijuan & Xiong, Yanyan & Yao, Xianguo, 2023. "Does the development of the Internet improve the allocative efficiency of production factors? Evidence from surveys of Chinese manufacturing firms," Structural Change and Economic Dynamics, Elsevier, vol. 66(C), pages 161-174.
    7. Li, Ningning & Wang, Yongjin, 2021. "Estimating resource misallocation: Distinguishing factor market distortions from variable markups," Economics Letters, Elsevier, vol. 207(C).
    8. Dai, Xiaoyong & Cheng, Liwei, 2019. "Aggregate productivity losses from factor misallocation across Chinese manufacturing firms," Economic Systems, Elsevier, vol. 43(1), pages 30-41.

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    More about this item

    Keywords

    Misallocation; TFP; Returns to scale;
    All these keywords.

    JEL classification:

    • C49 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Other
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic 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

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