Heterogeneous mark-ups, growth and endogenous misallocation

Peters, Michael (2013) Heterogeneous mark-ups, growth and endogenous misallocation. . London School of Economics and Political Science, London, UK.

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Abstract

The recent work on misallocation argues that aggregate productivity in poor countries is low because various market frictions prevent marginal products from being equalized. By focusing on such allocative inefficiencies, misallocation is construed as a purely static phenomenon. This paper argues that misallocation also has dynamic consequences because it interacts with firms’ innovation and entry decisions, which determine the economy’s growth rate. To study this link between misallocation and growth, I construct a tractable endogenous growth model with heterogeneous firms, where misallocation stems from imperfectly competitive output markets. The model has an analytical solution and hence makes precise predictions about the relationship between growth, misallocation and welfare. It stresses the importance of entry. An increase in entry reduces misallocation by fostering competition. If entry also increases the economy-wide growth rate, static misallocation and growth are negatively correlated. The welfare consequences of misallocation might therefore be much larger once these dynamic considerations are taken into account. Using firm-level panel data from Indonesia, I present reduced form evidence for the importance of imperfect output market and calibrate the structural parameters. A policy, which reduces existing entry barriers, increases growth and reduces misallocation. The dynamic growth effects are more than four times as large as their static counterpart.

Item Type:	Monograph (Working Paper)
Additional Information:	© 2013 The Author
Divisions:	Economics
Subjects:	H Social Sciences > HB Economic Theory
JEL classification:	D - Microeconomics > D4 - Market Structure and Pricing > D42 - Monopoly O - Economic Development, Technological Change, and Growth > O1 - Economic Development > O11 - Macroeconomic Analyses of Economic Development O - Economic Development, Technological Change, and Growth > O3 - Technological Change; Research and Development > O33 - Technological Change: Choices and Consequences; Diffusion Processes
Date Deposited:	11 Nov 2013 14:26
Last Modified:	13 Sep 2024 20:24
URI:	http://eprints.lse.ac.uk/id/eprint/54254

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