Productivity and Misallocation in General Equilibrium

78 Pages Posted: 20 Nov 2017

See all articles by David Rezza Baqaee

David Rezza Baqaee

London School of Economics & Political Science (LSE) - London School of Economics

Emmanuel Farhi

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: November 2017

Abstract

We provide a general non-parametric formula for aggregating microeconomic shocks in general equilibrium economies with distortions such as taxes, markups, frictions to resource reallocation, and nominal rigidities. We show that the macroeconomic impact of a shock can be boiled down into two components: its ``pure'' technology effect; and its effect on allocative efficiency arising from the associated reallocation of resources, which can be measured via changes in factor income shares. We also derive a formula showing how these two components are determined by structural microeconomic parameters such as elasticities of substitution, returns to scale, factor mobility, and network linkages. Overall, our results generalize those of Solow (1957) and Hulten (1978) to economies with distortions. To demonstrate their empirical relevance, we pursue different applications, focusing on markup distortions. For example, we operationalize our non-parametric results and show that improvements in allocative efficiency account for about 50% of measured TFP growth over the period 1997-2015. We also implement our structural results and conclude that eliminating markups would raise TFP by about 40%,

increasing the economywide cost of monopoly distortions by two orders of magnitude compared to the famous 0.1% estimates of Harberger (1954).

Suggested Citation

Baqaee, David Rezza and Farhi, Emmanuel, Productivity and Misallocation in General Equilibrium (November 2017). CEPR Discussion Paper No. DP12447, Available at SSRN: https://ssrn.com/abstract=3074446

David Rezza Baqaee (Contact Author)

London School of Economics & Political Science (LSE) - London School of Economics

United Kingdom

Emmanuel Farhi

Harvard University - Department of Economics ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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