Misallocation, Productivity and Development with Endogenous Production Techniques

Abstract

We study misallocation and sectoral productivity in a heterogeneous firms model with generalized production. Different from neo-classical models of production, our model endogenizes production-techniques and introduces firm-specific technique-distortions alongside factor- and scale-dependent distortions. Applying this micro-founded framework to firm-level data (US, China and India), we quantify that, for a broad range of manufacturing industry clusters, technique distortions generate more severe misallocation and sectoral TFP losses than capital and output distortions, accounting for about three quarters of the detrimental productivity effects. We thus uncover a quantitatively important channel for productivity growth and economic development resulting from within-firm organization of production.