Working Paper: NBER ID: w26711
Authors: Mark Bils; Peter J. Klenow; Cian Ruane
Abstract: The ratio of revenue to inputs differs greatly across plants within countries such as the U.S. and India. Such gaps may reflect misallocation which hinders aggregate productivity. But differences in measured average products need not reflect differences in true marginal products. We propose a way to estimate the gaps in true marginal products in the presence of measurement error. Our method exploits how revenue growth is less sensitive to input growth when a plant’s average products are overstated by measurement error. For Indian manufacturing from 1985-2013, our correction lowers potential gains from reallocation by 20%. For the U.S. the effect is even more dramatic, reducing potential gains by 60% and eliminating 2/3 of a severe downward trend in allocative efficiency over 1978-2013.
Keywords: Misallocation; Measurement Error; Allocative Efficiency
JEL Codes: O14; O41; O47; O51; O53
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| measurement error (C20) | misallocation (D61) |
| misallocation (D61) | aggregate productivity (E23) |
| measurement error (C20) | perceived value of marginal products (D46) |
| measurement error (C20) | allocative efficiency (D61) |
| revenue growth (O49) | input growth (O49) |
| overstated average products (C51) | weaker revenue growth sensitivity to input growth (O49) |
| input growth (O49) | revenue growth (O49) |
| measurement error (C20) | potential gains from reallocation (D61) |