Input-Output Networks and Misallocation
This paper develops a framework for studying the macroeconomic costs of resource misallocation. The framework enables the assessment of the conditions under which the existing estimates in the misallocation literature, which are largely based on a value-added production structure and ignore inter-sectoral linkages, provide an unbiased estimate of misallocation costs in relation to a more general setting, in which production of gross output relies upon input-output linkages across sectors. We show that in the absence of intermediate input distortions, the two approaches are isomorphic and will yield the same estimated aggregate productivity loss. When firm-specific intermediate input distortions are present, however, the value-added model produces biased estimates of TFP losses due to both model misspecification and incorrect inferences of firms' productivity and distortions. Using Chinese and Indian enterprise data, we find quantitatively similar TFP losses from resource misallocation for China, regardless of the model used, while for India, we infer significantly larger TFP losses under the gross output model.
We thank Robert Feenstra, Hugo Hopenhayn, Chang-Tai Hsieh, Pete Klenow; Sam Kortum, Ernest Liu, William Maloney, Gianmarco Ottaviano, Diego Restuccia, Michael Song, Chad Syverson, Felix Tintelnot, Johannes Van Biesebroeck, Daniel Xu, Xiaodong Zhu, conference participants at CEPR's Conferences on Global Value Chains and Trade and Development and NBER's China Meeting and seminar participants at Columbia University, Fudan University, Hitotsubashi University, Peking University, Stanford, UC Berkeley, UC Davis and the World Bank for many helpful comments and suggestions. Research support from the World Bank is gratefully acknowledged. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.