Government Misallocation and the Resource Curse

Resource-rich countries tend to employ a higher proportion of workers in the government sector than resource-poor countries. I construct a model with a productive government sector and examine optimal government employment in resource-rich countries. In the calibrated best-case-scenario model, predicted optimal government employment in resource-rich countries is nearly 10 times smaller than in the data. This implicit misallocation has a large impact on welfare and aggregate productivity. Using the calibrated model I find that a ten percentage point increase in resource windfalls is associated with a 1.72% lower aggregate productivity and a 1.11% lower welfare arising from government misallocation.