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Entrepreneurship and misallocation in production network economies

Author

Listed:
  • Tiago Cavalcanti

    (University of Cambridge
    CEPR
    Sao Paulo School of Economics-FGV)

  • Angelo Mendes

    (University of Minnesota)

  • Pierluca Pannella

    (Sao Paulo School of Economics-FGV)

Abstract

This paper investigates how sectoral linkages amplify or diminish misallocation at the intensive and extensive margins. Our analysis is based on a multisector general equilibrium model with input–output linkages, heterogeneous entrepreneurial abilities, and endogenous occupational choice. Distortions affect the intensive use of production inputs and they also impact the agents’ occupational decisions, misallocating the mass and type of entrepreneurs in different sectors of production. When the most distorted sectors are upstream (downstream), input–output linkages amplify (diminish) the loss from entreprenurial misallocation. We calibrate the model to the US and quantify the output losses from sectoral corporate taxes, decomposing the role of networks and the extensive margin decisions. We find that sectoral linkages quadruple the loss from the misallocation of entrepreneurs. We study an entry subsidy program, showing that it should target those sectors whose marginal entrepreneurs suffer larger profit losses, even if they are not necessarily the most distorted.

Suggested Citation

  • Tiago Cavalcanti & Angelo Mendes & Pierluca Pannella, 2024. "Entrepreneurship and misallocation in production network economies," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 78(1), pages 29-68, August.
    • Handle: RePEc:spr:joecth:v:78:y:2024:i:1:d:10.1007_s00199-023-01535-8
    DOI: 10.1007/s00199-023-01535-8
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    More about this item

    Keywords

    Distortions; Firm entry; Production network; Aggregate misallocation;
    All these keywords.

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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