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Estimating resource misallocation: Distinguishing factor market distortions from variable markups

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  • Li, Ningning
  • Wang, Yongjin

Abstract

This paper extends the approach of Hsieh and Klenow (2009) by relaxing the assumption of constant markup. We show that TFPR dispersion is not a sufficient statistic for misallocation under variable markup due to incomplete cost pass-through, and propose a general approach to measure the labor and capital distortions. We demonstrate that after taking into account variable markup, the extent of misallocation in China is considerably smaller in magnitude than the estimate in Hsieh and Klenow (2009).

Suggested Citation

  • Li, Ningning & Wang, Yongjin, 2021. "Estimating resource misallocation: Distinguishing factor market distortions from variable markups," Economics Letters, Elsevier, vol. 207(C).
    • Handle: RePEc:eee:ecolet:v:207:y:2021:i:c:s0165176521003049
    DOI: 10.1016/j.econlet.2021.110027
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    References listed on IDEAS

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    1. 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.
    2. Jan De Loecker & Frederic Warzynski, 2012. "Markups and Firm-Level Export Status," American Economic Review, American Economic Association, vol. 102(6), pages 2437-2471, October.
    3. 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.
    4. Brandt, Loren & Van Biesebroeck, Johannes & Zhang, Yifan, 2012. "Creative accounting or creative destruction? Firm-level productivity growth in Chinese manufacturing," Journal of Development Economics, Elsevier, vol. 97(2), pages 339-351.
    5. Loren Brandt & Johannes Van Biesebroeck & Luhang Wang & Yifan Zhang, 2017. "WTO Accession and Performance of Chinese Manufacturing Firms," American Economic Review, American Economic Association, vol. 107(9), pages 2784-2820, September.
    6. John Haltiwanger & Robert Kulick & Chad Syverson, 2018. "Misallocation Measures: The Distortion That Ate the Residual," NBER Working Papers 24199, National Bureau of Economic Research, Inc.
    7. Daniel A. Ackerberg & Kevin Caves & Garth Frazer, 2015. "Identification Properties of Recent Production Function Estimators," Econometrica, Econometric Society, vol. 83, pages 2411-2451, November.
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    Cited by:

    1. 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.
    2. Qiao, Sen & Zhao, Dong Hao & Guo, Zi Xin & Tao, Zhang, 2022. "Factor price distortions, environmental regulation and innovation efficiency: An empirical study on China's power enterprises," Energy Policy, Elsevier, vol. 164(C).

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