Working Paper: NBER ID: w13290
Authors: Changtai Hsieh; Peter J. Klenow
Abstract: Resource misallocation can lower aggregate total factor productivity (TFP). We use micro data on manufacturing establishments to quantify the potential extent of misallocation in China and India compared to the U.S. Compared to the U.S., we measure sizable gaps in marginal products of labor and capital across plants within narrowly-defined industries in China and India. When capital and labor are hypothetically reallocated to equalize marginal products to the extent observed in the U.S., we calculate manufacturing TFP gains of 30-50% in China and 40-60% in India.
Keywords: resource misallocation; total factor productivity; manufacturing; China; India
JEL Codes: O11; O47; O53
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| resource misallocation (D61) | disparities in marginal products of labor and capital (J79) |
| disparities in marginal products of labor and capital (J79) | lower aggregate total factor productivity (TFP) (O49) |
| resource misallocation (D61) | lower aggregate output (E23) |
| resource misallocation (D61) | lower total factor productivity (TFP) (D24) |
| reallocation of resources to equalize marginal products (F16) | substantial TFP gains in China (O49) |
| reallocation of resources to equalize marginal products (F16) | substantial TFP gains in India (O49) |
| deteriorating allocative efficiency in India (D61) | reduced TFP growth by 2% from 1987 to 1994 (O49) |
| improved allocative efficiency in China (D61) | improved TFP by 2% per year from 1998 to 2005 (O49) |