NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Misallocation Measures: The Distortion That Ate the Residual

John Haltiwanger, Robert Kulick, Chad Syverson

NBER Working Paper No. 24199
Issued in January 2018
NBER Program(s):Economic Fluctuations and Growth, Industrial Organization, Productivity, Innovation, and Entrepreneurship

A large literature on misallocation and productivity has arisen in recent years, with Hsieh and Klenow (2009; hereafter HK) as its standard empirical framework. The framework’s usefulness and theoretical founding make it a valuable starting point for analyzing misallocations. However, we show that the empirical lynchpin of this approach can be very sensitive to model misspecification. The condition in the HK model that maps from observed production behaviors to the misallocative wedges/distortions holds in a single theoretical case, with strict assumptions required on both the demand and supply sides. We demonstrate that applying the HK methodology when there is any deviation from these assumptions will mean that the “distortions” recovered from the data may not be signs of inefficiency. Rather, they may simply reflect demand shifts or movements of the firm along its marginal cost curve, quite possibly in directions related to higher profits for the business. The framework may then not just spuriously identify inefficiencies; it might be more likely to do so precisely for businesses better in some fundamental way than their competitors. Empirical tests in our data, which allow us to separate price and quantity and as such directly test the model’s assumptions, suggest the framework’s necessary conditions do not hold. We empirically investigate two of the possible sources of departures from the HK assumptions and implications and find support for both. We also find that measures of distortions that emerge from this approach are in fact strongly positively related with survival, suggesting they embody favorable profit conditions for the business. At the same time, however, once we condition on demand and supply fundamentals, the distortion measure becomes inversely related with survival. This suggests the measure may contain a distortionary component, but it is empirically swamped by other factors.

You may purchase this paper on-line in .pdf format from SSRN.com ($5) for electronic delivery.

Access to NBER Papers

You are eligible for a free download if you are a subscriber, a corporate associate of the NBER, a journalist, an employee of the U.S. federal government with a ".GOV" domain name, or a resident of nearly any developing country or transition economy.

If you usually get free papers at work/university but do not at home, you can either connect to your work VPN or proxy (if any) or elect to have a link to the paper emailed to your work email address below. The email address must be connected to a subscribing college, university, or other subscribing institution. Gmail and other free email addresses will not have access.

E-mail:

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w24199

 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us