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Market Failures and Misallocation

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  • Shenoy, Ajay

Abstract

I develop a method to measure and separate the production misallocation caused by failures in factor markets versus financial markets. When I apply the method to rice farming villages in Thailand I find surprisingly little misallocation. Optimal reallocation would increase output in most villages by less than 15 percent. By 2006 most misallocation comes from factor market failures. I derive a decomposition of aggregate growth that accounts for misallocation. Declining misallocation contributes little to growth compared to factor accumulation and rising farm productivity. I use a government credit intervention to test my measures. I confirm that credit causes a statistically significant decrease in only financial market misallocation.

Suggested Citation

  • Shenoy, Ajay, 2015. "Market Failures and Misallocation," Santa Cruz Department of Economics, Working Paper Series qt8m27w1r7, Department of Economics, UC Santa Cruz.
    • Handle: RePEc:cdl:ucscec:qt8m27w1r7
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    Cited by:

    1. Aragón, Fernando M. & Restuccia, Diego & Rud, Juan Pablo, 2022. "Are small farms really more productive than large farms?," Food Policy, Elsevier, vol. 106(C).
    2. Ajay Shenoy, 2018. "Risky Income or Lumpy Investments? Evidence on Two Theories of Underspecialization," Economic Development and Cultural Change, University of Chicago Press, vol. 66(4), pages 629-671.
    3. Shabbir Ahmad & Sriram Shankar & John Steen & Martie-Louise Verreynne & Abid Aman Burki, 2018. "What Drives Smallholders' Productivity in Pakistan's Horticultural Sector?," Discussion Papers Series 597, School of Economics, University of Queensland, Australia.
    4. Fernando Aragon & Diego Restuccia & Juan Pablo Rud, 2021. "Heterogeneity, Measurement Error, and Misallocation in African Agriculture: A Comment," Working Papers tecipa-697, University of Toronto, Department of Economics.
    5. Kebede, Hundanol A., 2022. "Market integration and separability of production and consumption decisions in farm households," Journal of Development Economics, Elsevier, vol. 158(C).
    6. Bruno Morando, 2023. "Subsistence Farming and Factor Misallocation: Evidence from Ugandan Agriculture," The World Bank Economic Review, World Bank, vol. 37(4), pages 570-598.
    7. Hongyun Zheng & Wanglin Ma, 2021. "The role of resource reallocation in promoting total factor productivity growth: Insights from China’s agricultural sector," Review of Development Economics, Wiley Blackwell, vol. 25(4), pages 2350-2371, November.
    8. Ahmad, Shabbir & Shankar, Sriram & Steen, John & Verreynne, Martie-Louise & Burki, Abid Aman, 2021. "Using measures of efficiency for regionally-targeted smallholder policy intervention: The case of Pakistan’s horticulture sector," Land Use Policy, Elsevier, vol. 101(C).
    9. Fernando Aragon & Diego Restuccia & Juan Pablo Rud, 2022. "Assessing misallocation in agriculture: plots versus farms," Working Papers tecipa-718, University of Toronto, Department of Economics.
    10. Lu, Shenghua & Wang, Hui, 2023. "How revolving-door recruitment makes firms stand out in land market: Evidence from China," China Economic Review, Elsevier, vol. 78(C).

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    Keywords

    Social and Behavioral Sciences; misallocation; financial market imperfections; Thailand; agriculture;
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