Why does misallocation persist?

Abhijit V. Banerjee, Benjamin Moll

Research output: Contribution to journalArticlepeer-review

64 Scopus citations

Abstract

Recent papers argue that the misallocation of resources can explain large cross-country TFP differences. This argument is underpinned by empirical evidence documenting substantial dispersion in the marginal products of resources, particularly capital, in developing countries. But why does misallocation persists? That is, why don't distortions disappear on their own? This is particularly true for capital misallocation, a point we illustrate in a simple model of capital accumulation with credit constraints. We distinguish between misallocation on the intensive and the extensive margin, and show that the former should disappear asymptotically under general conditions, while the latter may persist. We conclude by discussing possible theories of persistent misallocation.

Original languageEnglish (US)
Pages (from-to)189-206
Number of pages18
JournalAmerican Economic Journal: Macroeconomics
Volume2
Issue number1
DOIs
StatePublished - Jan 1 2010
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Economics, Econometrics and Finance(all)

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