Productivity and Misallocation in General Equilibrium*

By D. Baqaee, Emmanuel Farhi. Quarterly Journal of Economics, 2017

510 citations recorded by the source corpus.

This paper develops a general theory of aggregation in inefficient economies. We provide nonparametric formulas for aggregating microeconomic shocks in economies with distortions such as taxes, markups, frictions to resource reallocation, financial frictions, and nominal rigidities. We allow for arbitrary elasticities of substitution, returns to scale, factor mobility, and input-output network linkages. We show how to separately measure changes in technical and allocative efficiency. We also show how to compute the social cost of distortions. We pursue applications focusing on firm-level markups in the United States. We find that improvement in allocative efficiency, due to the reallocation over time of market share to high-markup firms, accounts for about half of 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 15%, increasing the economy-wide cost of monopoly distortions by two orders of magnitude compared with the famous 0.1% estimate by Harberger (1954). These exact numbers should be interpreted with care because the data are imperfect and require substantial imputation.

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Citations in the corpus

Endogenous Production Networks (2020, unknown): “Then given equilibrium technology choices represented by S∗, log prices satisfy p∗ = −(I − α(S∗))−1(a(S∗)− log(1 + μ)) = −L(S∗)(a(S∗)−m), (10)”
Networks, Barriers, and Trade (2019, unknown): “Following Baqaee and Farhi (2017b), deﬁne the ( C + N + F ) × ( C + N + F ) allocation matrix X as follows: X ij = x ij / y j is the share of good j used by i , where i and j index households, factors, and producers.”
A Theory of Falling Growth and Rising Rents (2019, background): “Similarly, De Loecker, Eeckhout and Unger (2020) and Baqaee and Farhi (2020) report the reallocation of sales shares toward Compustat firms with high ratios of sales to costs of goods sold.3 1See Figure A1b in the Online Appendix A for U.S. annual TFP growth in all non-farm private industries.”
Misallocation and Capital Market Integration: Evidence From India (2020, unknown): “First, we relate to the literature quantifying the importance of misallocation for aggregate outcomes (e.g. Restuccia and Rogerson, 2008; Hsieh and Klenow, 2009; Bartelsman, Haltiwanger, and Scarpetta, 2013; Restuccia and Rogerson, 2013; Baqaee and Farhi, 2017), particularly in the context of develo”
International Shocks, Variable Markups, and Domestic Prices (2019, background): “45Although the reallocation of sales shares across rms with di erent levels of markups is potentially an important source of change in the average markup in the economy, this composition e ect does not directly contribute to the aggregate passthrough into prices in (23) and (26), conditional on the ”
Market Power and Innovation in the Intangible Economy (2019, background): “Following Baqaee and Farhi (2018), I also drop firms with ratios of sales to cost of good sold or of sales to selling, general, and administrative expenses outside of the 2.”