Misallocation in the Presence of Multiple Production Technologies

While firms may employ different production technologies for producing the same or similar goods, the production technology used by each firm is typically not available in the data or otherwise known. Due to this limitation, researchers are often forced to assume all firms within an industry share a single production function. We develop a methodology based on cluster analysis that requires only firm level data on revenues and factor input expenditures, and allows us to identify when multiple production technologies are present in an industry and to identify the production technologies that each firm employs. We apply our methodology to Chilean plant level data and find strong evidence of multiple production technologies in most industries. We then evaluate the quantitative impact of this finding as it relates to the misallocation literature. While most studies of misallocation attribute all variation in factor input expenditure shares across firms within an industry to misallocation, we are able to use our framework to separate variation arising due to misallocation from variation resulting from differences in production technologies across firms. After accounting for the presence of multiple production technologies, we find that the estimated gains in manufacturing TFP and output from eliminating misallocation decrease by approximately 60 percent.