Heterogeneous Markups, Growth, and Endogenous Misallocation
By Michael Peters. 2020
174 citations recorded by the source corpus.
The recent work on misallocation argues that aggregate productivity in poor countries is low because various market frictions prevent marginal products from being equalized. By focusing on such allocative inefficiencies, misallocation is construed as a purely static phenomenon. This paper argues that misallocation also has dynamic consequences because it interacts with firms’ innovation and entry decisions, which determine the economy’s growth rate. To study this link between misallocation and growth, I construct a tractable endogenous growth model with heterogeneous firms, where misallocation stems from imperfectly competitive output markets. The model has an analytical solution and hence makes precise predictions about the relationship between growth, misallocation and welfare. It stresses the importance of entry. An increase in entry reduces misallocation by fostering competition. If entry also increases the economy-wide growth rate, static misallocation and growth are negatively correlated. The welfare consequences of misallocation might therefore be much larger once these dynamic considerations are taken into account. Using firm-level panel data from Indonesia, I present reduced form evidence for the importance of imperfect output market and calibrate the structural parameters. A policy, which reduces existing entry barriers, increases growth and reduces misallocation. The dynamic growth effects are more than four times as large as their static counterpart.
Subfields: Economics and Econometrics
View Paper: https://www.semanticscholar.org/paper/435178a28f54795a6764652eb6274b3a947d23b6
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In Economics and Econometrics
Citations in the corpus
- How Costly Are Markups? (2018, unknown): “Peters (2020) studies innovation, firm dynamics, and variable markups but does not evaluate the welfare costs of markups.”
- Competition and the Welfare Gains from Transportation Infrastructure: Evidence from the Golden Quadrilateral of India (2018, unknown): “Other papers in this literature include Guner, Ventura, and Xu (2008), Restuccia and Rogerson (2008), and Peters (2013). In contrast to the existing literature, we quantitatively study the effects of a policy that actually took place instead of a counterfactual that removes all misallocation in the ”
- The Sources of Capital Misallocation (2019, unknown): “…Collard-Wexler, and De Loecker ( 2014 ) on adjustment costs; Buera, Kaboski, and Shin ( 2011 ) , Midrigan and Xu ( 2014 ) , Moll ( 2014 ) , and Gopinath et al. ( 2017 ) on financial frictions; David, Hopenhayn, and Venkateswaran ( 2016 ) on uncertainty; and Peters ( 2016 ) on markup dispersion.”
- Informality: Causes and Consequences for Development (2020, background): “In other countries, coverage is typically limited to formal firms and workers (e.g. Indonesia (Peters 2019)).”