IDEAS home Printed from https://ideas.repec.org/p/red/sed018/561.html
   My bibliography  Save this paper

Misallocation and intersectoral linkages

Author

Listed:
  • Sophie Osotimehin

    (University of Virginia)

  • Latchezar Popov

    (Texas Tech University)

Abstract

We study the effects of distortions in the use of primary and intermediate inputs on aggregate productivity. We show analytically how the aggregate productivity loss from distortions depends on the input-output structure of the economy and the degree of complementarity between inputs. We find that the production network does not systematically amplify the aggregate productivity loss, and that higher complementarity between inputs reduce the effects of distortions. Then, we apply our framework to quantify the effects of distortions caused by market power. Calibrated on Mexican industry-level data, the model suggests that reducing industry-level markups in Mexico to the US levels could raise aggregate TFP by as much as 15 percent. The TFP gain is as much as 5 times larger than without input-output linkages.

Suggested Citation

  • Sophie Osotimehin & Latchezar Popov, 2018. "Misallocation and intersectoral linkages," 2018 Meeting Papers 561, Society for Economic Dynamics.
  • Handle: RePEc:red:sed018:561
    as

    Download full text from publisher

    File URL: https://red-files-public.s3.amazonaws.com/meetpapers/2018/paper_561.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Vasco M Carvalho & Makoto Nirei & Yukiko U Saito & Alireza Tahbaz-Salehi, 2021. "Supply Chain Disruptions: Evidence from the Great East Japan Earthquake," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 136(2), pages 1255-1321.
    2. Enghin Atalay, 2017. "How Important Are Sectoral Shocks?," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(4), pages 254-280, October.
    3. repec:spo:wpecon:info:hdl:2441/3lt9cev6r09aqpj1a1248i83gg is not listed on IDEAS
    4. Saki Bigio & Jennifer La’O, 2020. "Distortions in Production Networks," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(4), pages 2187-2253.
    5. Nathan Nunn, 2007. "Relationship-Specificity, Incomplete Contracts, and the Pattern of Trade," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 122(2), pages 569-600.
    6. Jorge Miranda-Pinto & Eric R. Young, 2022. "Flexibility and Frictions in Multisector Models," American Economic Journal: Macroeconomics, American Economic Association, vol. 14(3), pages 450-480, July.
    7. Epifani, Paolo & Gancia, Gino, 2011. "Trade, markup heterogeneity and misallocations," Journal of International Economics, Elsevier, vol. 83(1), pages 1-13, January.
    8. Pol Antras & Davin Chor & Thibault Fally & Russell Hillberry, 2012. "Measuring the Upstreamness of Production and Trade Flows," American Economic Review, American Economic Association, vol. 102(3), pages 412-416, May.
    9. Dale Jorgenson, 1967. "The Theory of Investment Behavior," NBER Chapters, in: Determinants of Investment Behavior, pages 129-175, National Bureau of Economic Research, Inc.
    10. David Rezza Baqaee & Emmanuel Farhi, 2020. "Productivity and Misallocation in General Equilibrium," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(1), pages 105-163.
    11. Shaowen Luo, 2020. "Propagation of Financial Shocks in an Input-Output Economy with Trade and Financial Linkages of Firms," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 36, pages 246-269, April.
    12. Vasco M Carvalho & Makoto Nirei & Yukiko U Saito & Alireza Tahbaz-Salehi, 0. "Supply Chain Disruptions: Evidence from the Great East Japan Earthquake," The Quarterly Journal of Economics, Oxford University Press, vol. 136(2), pages 1255-1321.
    13. Lorenzo Caliendo & Fernando Parro & Aleh Tsyvinski, 2017. "Distortions and the Structure of the World Economy," NBER Working Papers 23332, National Bureau of Economic Research, Inc.
    14. Fadinger, Harald & Ghiglino, Christian & Teteryatnikova, Mariya, 2015. "Income differences and input-output structure," Working Papers 15-11, University of Mannheim, Department of Economics.
    15. Ezra Oberfield & Devesh Raval, 2021. "Micro Data and Macro Technology," Econometrica, Econometric Society, vol. 89(2), pages 703-732, March.
    16. Saki Bigio, 2013. "Financial Frictions in Production Networks," 2013 Meeting Papers 121, Society for Economic Dynamics.
    17. Chang-Tai Hsieh & Peter J. Klenow, 2009. "Misallocation and Manufacturing TFP in China and India," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 124(4), pages 1403-1448.
    18. repec:hal:wpspec:info:hdl:2441/3lt9cev6r09aqpj1a1248i83gg is not listed on IDEAS
    19. Hugo A. Hopenhayn, 2014. "Firms, Misallocation, and Aggregate Productivity: A Review," Annual Review of Economics, Annual Reviews, vol. 6(1), pages 735-770, August.
    20. Costinot, Arnaud & Rodríguez-Clare, Andrés, 2014. "Trade Theory with Numbers: Quantifying the Consequences of Globalization," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 197-261, Elsevier.
    21. Loukas Karabarbounis & Brent Neiman, 2019. "Accounting for Factorless Income," NBER Macroeconomics Annual, University of Chicago Press, vol. 33(1), pages 167-228.
    22. Johannes Boehm & Ezra Oberfield, 2020. "Misallocation in the Market for Inputs: Enforcement and the Organization of Production," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(4), pages 2007-2058.
    23. Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production: I--Production Efficiency," American Economic Review, American Economic Association, vol. 61(1), pages 8-27, March.
    24. Diego Restuccia & Richard Rogerson, 2008. "Policy Distortions and Aggregate Productivity with Heterogeneous Plants," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(4), pages 707-720, October.
    25. Rotemberg, Julio J & Woodford, Michael, 1996. "Imperfect Competition and the Effects of Energy Price Increases on Economic Activity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 550-577, November.
    26. Sophie Osotimehin, 2019. "Aggregate productivity and the allocation of resources over the business cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 32, pages 180-205, April.
    27. Kristian Behrens & Giordano Mion & Yasusada Murata & Jens Suedekum, 2020. "Quantifying the Gap Between Equilibrium and Optimum under Monopolistic Competition," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(4), pages 2299-2360.
    28. Basu, Susanto, 1995. "Intermediate Goods and Business Cycles: Implications for Productivity and Welfare," American Economic Review, American Economic Association, vol. 85(3), pages 512-531, June.
    29. Robert C. Feenstra & Philip Luck & Maurice Obstfeld & Katheryn N. Russ, 2018. "In Search of the Armington Elasticity," The Review of Economics and Statistics, MIT Press, vol. 100(1), pages 135-150, March.
    30. Toshihiko Mukoyama & Latchezar Popov, 2020. "Industrialization and the evolution of enforcement institutions," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 69(3), pages 745-788, April.
    31. David Rezza Baqaee & Emmanuel Farhi, 2019. "The Macroeconomic Impact of Microeconomic Shocks: Beyond Hulten's Theorem," Econometrica, Econometric Society, vol. 87(4), pages 1155-1203, July.
    32. repec:spo:wpmain:info:hdl:2441/3lt9cev6r09aqpj1a1248i83gg is not listed on IDEAS
    33. Marcel P. Timmer & Erik Dietzenbacher & Bart Los & Robert Stehrer & Gaaitzen J. Vries, 2015. "An Illustrated User Guide to the World Input–Output Database: the Case of Global Automotive Production," Review of International Economics, Wiley Blackwell, vol. 23(3), pages 575-605, August.
    34. Charles R. Hulten, 1978. "Growth Accounting with Intermediate Inputs," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 45(3), pages 511-518.
    35. Ernest Liu, 2019. "Industrial Policies in Production Networks," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 134(4), pages 1883-1948.
    36. Julio J. Rotemberg & Michael Woodford, 1993. "Dynamic General Equilibrium Models with Imperfectly Competitive Product Markets," NBER Working Papers 4502, National Bureau of Economic Research, Inc.
    37. Jan De Loecker & Jan Eeckhout & Gabriel Unger, 2020. "The Rise of Market Power and the Macroeconomic Implications [“Econometric Tools for Analyzing Market Outcomes”]," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(2), pages 561-644.
    38. Sophie Osotimehin, 2019. "Aggregate productivity and the allocation of resources over the business cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 32, pages 180-205, April.
    39. Simcha Barkai, 2020. "Declining Labor and Capital Shares," Journal of Finance, American Finance Association, vol. 75(5), pages 2421-2463, October.
    40. Swati Dhingra & John Morrow, 2019. "Monopolistic Competition and Optimum Product Diversity under Firm Heterogeneity," Journal of Political Economy, University of Chicago Press, vol. 127(1), pages 196-232.
    41. Dominick Bartelme & Yuriy Gorodnichenko, 2015. "Linkages and Economic Development," NBER Working Papers 21251, National Bureau of Economic Research, Inc.
    42. Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production II: Tax Rules," American Economic Review, American Economic Association, vol. 61(3), pages 261-278, June.
    43. repec:hal:spmain:info:hdl:2441/3lt9cev6r09aqpj1a1248i83gg is not listed on IDEAS
    44. Jorge Miranda Pinto, 2021. "Production Network Structure, Service Share, and Aggregate Volatility," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 39, pages 146-173, January.
    45. Charles I. Jones, 2011. "Intermediate Goods and Weak Links in the Theory of Economic Development," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(2), pages 1-28, April.
    46. Fadinger, Harald & Ghiglino, Christian & Teteryatnikova, Mariya, 2015. "Income differences and input-output structure," Working Papers 15-11, University of Mannheim, Department of Economics.
    47. Lorenzo Caliendo & Fernando Parro & Aleh Tsyvinski, 2022. "Distortions and the Structure of the World Economy," American Economic Journal: Macroeconomics, American Economic Association, vol. 14(4), pages 274-308, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Shaowen Luo & Kwok Ping Tsang, 2020. "China And World Output Impact Of The Hubei Lockdown During The Coronavirus Outbreak," Contemporary Economic Policy, Western Economic Association International, vol. 38(4), pages 583-592, October.
    2. Johannes Boehm & Ezra Oberfield, 2020. "Misallocation in the Market for Inputs: Enforcement and the Organization of Production," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(4), pages 2007-2058.
    3. Sophie Osotimehin & Latchezar Popov, 2020. "Sectoral Impact of COVID19: Cascading Risks," Working Papers 20-11, Chair in macroeconomics and forecasting, University of Quebec in Montreal's School of Management.
    4. Jorge Miranda-Pinto & Eric R. Young, 2022. "Flexibility and Frictions in Multisector Models," American Economic Journal: Macroeconomics, American Economic Association, vol. 14(3), pages 450-480, July.
    5. Sophie Osotimehin & Latchezar Popov, 2020. "Sectoral Impact of COVID-19: Cascading Risks," Opportunity and Inclusive Growth Institute Working Papers 31, Federal Reserve Bank of Minneapolis.
    6. repec:hal:spmain:info:hdl:2441/3lt9cev6r09aqpj1a1248i83gg is not listed on IDEAS
    7. repec:hal:wpspec:info:hdl:2441/3lt9cev6r09aqpj1a1248i83gg is not listed on IDEAS
    8. Toshihiko Mukoyama & Latchezar Popov, 2020. "Industrialization and the evolution of enforcement institutions," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 69(3), pages 745-788, April.
    9. A. Kerem Cosar & Latchezar Popov & Sophie Osotimehin, 2019. "Regional and Aggregate Implications of Transportation Costs and Tradability of Services," 2019 Meeting Papers 237, Society for Economic Dynamics.
    10. David Baqaee & Emmanuel Farhi, 2020. "Entry vs. Rents: Aggregation with Economies of Scale," NBER Working Papers 27140, National Bureau of Economic Research, Inc.
    11. Lin Shao & Rongsheng Tang, 2021. "Allocative Efficiency and Aggregate Productivity Growth in Canada and the United States," Staff Working Papers 21-1, Bank of Canada.
    12. repec:spo:wpecon:info:hdl:2441/3lt9cev6r09aqpj1a1248i83gg is not listed on IDEAS
    13. repec:spo:wpmain:info:hdl:2441/3lt9cev6r09aqpj1a1248i83gg is not listed on IDEAS

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Sophie Osotimehin & Latchezar Popov, 2023. "Misallocation and Intersectoral linkages," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 177-198, December.
    2. David Rezza Baqaee & Emmanuel Farhi, 2020. "Productivity and Misallocation in General Equilibrium," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(1), pages 105-163.
    3. Alonso de Gortari, 2018. "Disentangling Global Value Chains," 2018 Meeting Papers 139, Society for Economic Dynamics.
    4. Emmanuel Dhyne & Ayumu Ken Kikkawa & Glenn Magerman, 2022. "Imperfect Competition in Firm-to-Firm Trade," Journal of the European Economic Association, European Economic Association, vol. 20(5), pages 1933-1970.
    5. Lorenzo Caliendo & Fernando Parro & Aleh Tsyvinski, 2017. "Distortions and the Structure of the World Economy," NBER Working Papers 23332, National Bureau of Economic Research, Inc.
    6. Jorge Miranda Pinto, 2021. "Production Network Structure, Service Share, and Aggregate Volatility," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 39, pages 146-173, January.
    7. David Rezza Baqaee & Emmanuel Farhi, 2018. "Macroeconomics with Heterogeneous Agents and Input-Output Networks," NBER Working Papers 24684, National Bureau of Economic Research, Inc.
    8. Liang, Yan, 2022. "Impact of financial development on outsourcing and aggregate productivity," Journal of Development Economics, Elsevier, vol. 154(C).
    9. Johannes Boehm & Ezra Oberfield, 2020. "Misallocation in the Market for Inputs: Enforcement and the Organization of Production," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(4), pages 2007-2058.
    10. Ernesto Pasten & Raphael Schoenle & Michael Weber, 2017. "Price Rigidity and the Origins of Aggregate Fluctuations," NBER Working Papers 23750, National Bureau of Economic Research, Inc.
    11. Emmanuel Dhyne & Ayumu Ken Kikkawa & Magne Mogstad & Felix Tintelnot, 2021. "Trade and Domestic Production Networks," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 88(2), pages 643-668.
    12. Daron Acemoglu & Pablo D. Azar, 2020. "Endogenous Production Networks," Econometrica, Econometric Society, vol. 88(1), pages 33-82, January.
    13. David Rezza Baqaee & Emmanuel Farhi, 2019. "The Macroeconomic Impact of Microeconomic Shocks: Beyond Hulten's Theorem," Econometrica, Econometric Society, vol. 87(4), pages 1155-1203, July.
    14. Ernesto Pasten & Raphael S. Schoenle & Michael Weber & Michael Weber, 2017. "Price Rigidities and the Granular Origins of Aggregate Fluctuations," CESifo Working Paper Series 6619, CESifo.
    15. Johannes Boehm, 2014. "The Impact of Contract Enforcement Costs on Outsourcing and Aggregate Productivity," 2014 Meeting Papers 340, Society for Economic Dynamics.
    16. Miranda-Pinto, Jorge, 2018. "A note on optimal sectoral policies in production networks," Economics Letters, Elsevier, vol. 172(C), pages 152-156.
    17. Michael Weber & Ali Ozdagli, 2016. "Monetary Policy Through Production Networks: Evidence from the Stock Market," 2016 Meeting Papers 148, Society for Economic Dynamics.
    18. Ian Dew‐Becker, 2023. "Tail Risk in Production Networks," Econometrica, Econometric Society, vol. 91(6), pages 2089-2123, November.
    19. Miranda-Pinto, Jorge & Silva, Alvaro & Young, Eric R., 2023. "Business cycle asymmetry and input-output structure: The role of firm-to-firm networks," Journal of Monetary Economics, Elsevier, vol. 137(C), pages 1-20.
    20. Yoshiyuki ARATA & Daisuke MIYAKAWA, 2021. "The Size of Micro-originated Aggregate Fluctuations: An analysis of firm-level input-output linkages in Japan," Discussion papers 21066, Research Institute of Economy, Trade and Industry (RIETI).

    More about this item

    JEL classification:

    • D57 - Microeconomics - - General Equilibrium and Disequilibrium - - - Input-Output Tables and Analysis
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:red:sed018:561. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Christian Zimmermann (email available below). General contact details of provider: https://edirc.repec.org/data/sedddea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.