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Misallocation, productivity and fragmentation of production: the case of Latvia

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  • Konstantins Benkovskis

    (Latvijas Banka
    Stockholm School of Economics in Riga)

Abstract

This paper evaluates misallocation of resources in Latvia during 2007–2014 using firm-level data. I find that misallocation of resources increased before 2010 and declined afterwards. Initially, output distortion was the major source of misallocation, while the importance of capital distortions increased after the financial crisis. Determinants of changes in allocation efficiency may include growing competition in domestic markets, tighter credit supply and legal issues. However, I show that fragmentation of production induces bias to the estimates of firm-specific distortions, leading to the overestimation of gains from reallocation. Thus, in the absence of inter-firm trade data, the conclusions on misallocation should be treated with caution.

Suggested Citation

  • Konstantins Benkovskis, 2018. "Misallocation, productivity and fragmentation of production: the case of Latvia," Journal of Productivity Analysis, Springer, vol. 49(2), pages 187-206, June.
    • Handle: RePEc:kap:jproda:v:49:y:2018:i:2:d:10.1007_s11123-018-0530-1
    DOI: 10.1007/s11123-018-0530-1
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    2. Bernini, Cristina & Galli, Federica, 2023. "Innovation, productivity and spillover effects in the Italian accommodation industry," Economic Modelling, Elsevier, vol. 119(C).

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