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Misallocation or Mismeasurement?

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  • Bils, Mark
  • Klenow, Peter J.
  • Ruane, Cian

Abstract

The ratio of revenue to inputs differs greatly across plants within countries such as the U.S. and India. Such gaps may reflect misallocation which lowers aggregate productivity. But differences in measured average products need not reflect differences in true marginal products. We propose a way to estimate the gaps in true marginal products in the presence of measurement error. Our method exploits how revenue growth is less sensitive to input growth when a plant’s average products are overstated by measurement error. For Indian manufacturing from 1985 to 2013, our correction lowers potential gains from reallocation by 20%. For the U.S. the effect is even more dramatic, reducing potential gains by 60% and eliminating 2/3 of a severe downward trend in allocative efficiency over 1978 to 2013.

Suggested Citation

  • Bils, Mark & Klenow, Peter J. & Ruane, Cian, 2021. "Misallocation or Mismeasurement?," Journal of Monetary Economics, Elsevier, vol. 124(S), pages 39-56.
    • Handle: RePEc:eee:moneco:v:124:y:2021:i:s:p:s39-s56
    DOI: 10.1016/j.jmoneco.2021.09.004
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    References listed on IDEAS

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    More about this item

    Keywords

    Misallocation; Measurement error; Productivity;
    All these keywords.

    JEL classification:

    • 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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