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Misallocation under Endogenous Markups: Theory and Evidence from China

Speaker: Zheng Song
Speaker Intro:

Prof. Zheng Song's CV


This paper develops a quantitative framework for misallocation under endogenous markups. On the theoretical side, we generalize the Hsieh-Klenow approach. In particular, it illustrates a novel channel through which firm-level misallocation causes sectoral misallocation and, then, aggregate efficiency losses. Using China’s tax survey data covering half million manufacturing and service firms, we structurally estimate the model and find: (i) TFP, markups and wedges are all positively correlated and (ii) the correlations are much stronger in the service sector. These findings suggest severe sectoral misallocation in China. When the correlation between firm TFP and wedges are hypothetically reduced to the extent observed in the manufacturing sector, we find labor reallocation of 6 percentage points from manufacturing to service and an aggregate welfare gain of 10 percent. In contrast, the Hsieh-Klenow formula would imply zero sectoral labor reallocation and much smaller welfare gain.

Time: 2017-12-22(Friday)12:30-13:30
Venue: N303, Econ Building