Misallocation, Selection and Productivity: A Quantitative Analysis with Panel Data from China

Tasso Adamopoulos, Loren Brandt, Jessica Leight, Diego Restuccia

NBER Working Paper No. 23039
Issued in January 2017, Revised in November 2017
NBER Program(s):Development Economics, Economic Fluctuations and Growth, Productivity, Innovation, and Entrepreneurship

We use household-level panel data from China and a quantitative framework to document the extent and consequences of factor misallocation in agriculture. We find that there are substantial frictions in both the land and capital markets linked to land institutions in rural China that disproportionately constrain the more productive farmers. These frictions reduce aggregate agricultural productivity in China by affecting two key margins: (1) the allocation of resources across farmers (misallocation) and (2) the allocation of workers across sectors, in particular the type of farmers who operate in agriculture (selection). We show that selection can substantially amplify the static misallocation effect of distortionary policies by affecting occupational choices that worsen the distribution of productive units in agriculture.

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Document Object Identifier (DOI): 10.3386/w23039

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