Discussion paper

DP16927 Occupational Choice and Misallocation in Production Network Economies

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.


Cavalcanti, T and P Pannella (2022), ‘DP16927 Occupational Choice and Misallocation in Production Network Economies‘, CEPR Discussion Paper No. 16927. CEPR Press, Paris & London. https://cepr.org/publications/dp16927