Working Paper: NBER ID: w24007
Authors: David Rezza Baqaee; Emmanuel Farhi
Abstract: This paper develops a general theory of aggregation in inefficient economies. We provide non-parametric 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 U.S. 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 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.
Keywords: Productivity; Misallocation; General Equilibrium; Firm-level Markups
JEL Codes: D24; D33; D42; D43; D5; D50; D57; D61; E01; E25; E52; O4; O41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| reallocation of market share to high-markup firms (D43) | aggregate TFP growth (O49) |
| eliminating misallocation from large and dispersed markups (D61) | aggregate TFP growth (O49) |
| misallocation of resources due to firm-level markups (L11) | changes in allocative efficiency (D61) |
| misallocation of resources due to firm-level markups (L11) | changes in technical efficiency (O49) |