Working Paper: NBER ID: w31311
Authors: Paul Carrillo; Dave Donaldson; Dina Pomeranz; Monica Singhal
Abstract: This paper develops new tools to study misallocation that do not require assumptions about the heterogeneity of firms’ technologies. We show how features of the distribution of marginal products can be identified from exogenous variation in firms’ input use and used both to test for misallocation and to quantify its resulting welfare losses. We apply this method to a setting with exogenous demand shocks from public procurement contracts for construction services in Ecuador. Our results reject the null of efficiency but our estimates of the resulting welfare losses from misallocation are small.
Keywords: Misallocation; Firm Production; Public Procurement; Welfare Losses
JEL Codes: D24; D61; H57; L10; O40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Procurement lottery winnings (H57) | Firm sales (L21) |
| Procurement lottery winnings (H57) | Firm input usage (D22) |
| Exogenous demand shocks (E39) | Firm outputs (D21) |
| Procurement lottery winnings (H57) | Violation of unconstrained allocative efficiency (UAEP) (D61) |
| Cost of misallocation (D61) | Lower than typical estimates (C13) |
| Test for UAEP rejected (C12) | Significant misallocation (D61) |
| Test for CAEP not rejected (C52) | Misallocation may not be as severe (D61) |