DP12727 Misallocation: Markups and Technology

Author(s): Christian Bayer, Ariel Mecikovsky, Matthias Meier
Publication Date: February 2018
Date Revised: October 2018
Keyword(s): Competition, Development, Misallocation, productivity
JEL(s): D24, E23, O47
Programme Areas: Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=12727

The seminal paper by Hsieh and Klenow (2009) shows that aggregate TFP losses from misallocation are large, that misallocation is important in explaining international TFP differences, and that these losses can be quantified through factor productivity dispersions. Using micro data from Chile, Colombia, Indonesia, and Germany, we show that there is substantial correlation in factor productivities across factors and therefore propose to decompose dispersion in factor productivities in dispersion in technology and markup instead, which are orthogonal to each other. Relative to Germany, misallocation is larger in the developing economies and the TFP losses from misallocation are explained to 1/3 by larger technology and to 2/3 by larger markup dispersion. Finally, we discuss potential sources of markup and technology dispersion and how they can rationalize the observed dispersions as market outcomes.