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Resource misallocation can lower aggregate Total Factor Productivity (TFP). The authors use micro data on manufacturing establishments to quantify the potential extent of misallocation in China and India compared to the U.S. Compared to the U.S., they measure sizable gaps in marginal products of labor and capital across plants within narrowly-defined industries in China and India. When capital and labor are hypothetically reallocated to equalize marginal products to the extent observed in the U.S., they calculate manufacturing TFP gains of 30-50% in China and 40-60% in India.
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