Grouped Variation In Factor Shares: An Application To Misallocation

A striking feature of microlevel plant data is the presence of significant variation in factor cost shares across plants within an industry. We develop a methodology based on cluster analysis to decompose cost shares into idiosyncratic and group‐specific components. We apply our methodology to Chilean plant‐level data and find that group‐specific variation accounts for approximately one‐third of the variation in cost shares. We study the implications of these groups in cost shares on the gains from eliminating misallocation. We place bounds on their importance and find that ignoring them can overstate the gains from eliminating misallocation by up to one‐third .