Productivity and Misallocation in General Equilibrium

David Rezza Baqaee, Emmanuel Farhi

NBER Working Paper No. 24007
Issued in November 2017, Revised in May 2019
NBER Program(s):The Economic Fluctuations and Growth Program

We provide a general non-parametric formula for aggregating microeconomic shocks in economies with distortions such as taxes, markups, frictions to resource reallocation, and nominal rigidities. The macroeconomic impact of a shock can be boiled down into two components: its “pure” technology effect, and its effect on allocative efficiency arising from the reallocation of resources. The latter can be measured via changes in factor income shares. We also derive a formula showing how these two components are determined by structural microeconomic primitives such as elasticities of substitution, returns to scale, factor mobility, and input-output network linkages. Our results generalize those of Solow (1957) and Hulten (1978) to economies with distortions. We pursue some applications focusing on firm-level markups in the US. We find that cumulated improvements in allocative efficiency due to the reallocation over time of market share to high-markup firms account for about half of measured aggregate TFP growth over the period 1997-2015. We also find that eliminating the misallocation resulting from the large and dispersed markups estimated in the data would raise aggregate TFP by about 20%, increasing the economywide cost of monopoly distortions by two orders of magnitude compared to the famous 0.1% estimate by Harberger (1954). These exact numbers should be interpreted with care since the data is imperfect and requires substantial imputation.

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Document Object Identifier (DOI): 10.3386/w24007

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