DP16927 Occupational Choice and Misallocation in Production Network Economies

Author(s): Tiago Cavalcanti, Angelo Medes, Pierluca Pannella
Publication Date: January 2022
Keyword(s): Aggregate Misallocation, Distortions, Firm entry, Production Network
JEL(s): E23, L26, O11, O41
Programme Areas: Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16927

This paper investigates how sectoral linkages amplify or diminish misallocation at the intensive and extensive margins. Our analysis is based on a multisector general equilibrium model with input-output linkages, heterogeneous entrepreneurial abilities, and endogenous occupational choice. Distortions misallocate the intensive use of production inputs, but they also affect productivity through two additional wedges: a "labor-entrepreneurship" wedge, which misallocates agents between entrepreneurship and the labor force; and a "between- sector" wedge, which misallocates entrepreneurs among the different sectors. When the most distorted sectors are upstream (downstream), input-output linkages amplify (dimin- ish) the loss from the misallocation of entrepreneurs. We calibrate the model to the US and quantify the output losses from distortions, decomposing the role of networks and the ex- tensive margin decisions. We study an entry subsidy program, showing that it should target sectors with large profit losses, even if they are not necessarily the most distorted.