Sources of Misallocation
by Yuriy Gorodnichenko
Although numerous studies document the ability of various frictions to generate significant misallocation effects, the nature of these frictions is poorly understood. These frictions could be differences in access to external finance, access to infrastructure, various regulatory constraints, rigidities in the labor market, etc. In fact, observed dispersion of the marginal products of capital (or labor), which proxies for misallocation of resources, may be due to measurement errors and, as a result, the current framework of measuring misallocation can overstate gains from reforming institutions. This project uses newly available data to assess quantitative significance of various frictions and measurement issues.