Sunday, June 13, 2010

Misallocation and Productivity

I just read two interesting papers that highlight how market distortions like labor market regulations or capital subsidies can affect both actual productivity in a country and also our attempts to measure productivity in a country.

First is Hseih & Klenow's MISALLOCATION AND MANUFACTURING TFP
IN CHINA AND INDIA
(QJE 2009, ungated version here). They use firm level data and estimate that if resources were allocated across sectors in China and India the same way they are in the USA, that manufacturing productivity could rise 40% or more!

No word on how eliminating distortions in the USA would raise our productivity though.

Second is a new NBER paper (ungated version here) by Fernald & Neiman entitled Growth Accounting with Misallocation: Or, Doing Less with More in Singapore. They set up a model which shows how having a sector of the economy that has preferential access to resources and earns a pure profit can cause different techniques for measuring productivity growth (i.e. using quantities vs. prices) can produced answers that disagree with each other and fail to capture actual productivty growth.

Interestingly, their case study of Singapore shows that the subsidized sector of the economy their had negative productivity growth even more severe than that estimated by Young in his classic piece.