TY - JOUR
T1 - Misallocation and intersectoral linkages
AU - Osotimehin, Sophie
AU - Popov, Latchezar
N1 - Publisher Copyright:
© 2023 Elsevier Inc.
PY - 2023/12
Y1 - 2023/12
N2 - We analytically characterize the aggregate productivity loss from distortions in the presence of sectoral production linkages and show the key role of input substitutability. We analyze the various forces behind the non-monotonic effect of input substitutability on the productivity loss. We then use the second-order approximation to aggregate productivity and find that for moderate distortions, low input substitutability reduces the productivity loss and the role of intermediate-input suppliers. Moreover, when the input elasticity of substitution is low, sectoral linkages do not systematically amplify the productivity loss. Using the model calibrated on industry-level data for 35 countries, we find that the insights obtained from the approximation are relevant in the context of the sectoral distortions caused by market power, even with the large distortions observed in the data. In particular, we find that using Cobb-Douglas production functions (unit elasticities) instead of accounting for low input substitutability (less-than-one elasticities) leads to overestimating the productivity loss by a factor of 1.8.
AB - We analytically characterize the aggregate productivity loss from distortions in the presence of sectoral production linkages and show the key role of input substitutability. We analyze the various forces behind the non-monotonic effect of input substitutability on the productivity loss. We then use the second-order approximation to aggregate productivity and find that for moderate distortions, low input substitutability reduces the productivity loss and the role of intermediate-input suppliers. Moreover, when the input elasticity of substitution is low, sectoral linkages do not systematically amplify the productivity loss. Using the model calibrated on industry-level data for 35 countries, we find that the insights obtained from the approximation are relevant in the context of the sectoral distortions caused by market power, even with the large distortions observed in the data. In particular, we find that using Cobb-Douglas production functions (unit elasticities) instead of accounting for low input substitutability (less-than-one elasticities) leads to overestimating the productivity loss by a factor of 1.8.
KW - Aggregate productivity
KW - CES production function
KW - Input-output
KW - Market power
KW - Misallocation
KW - Production network
UR - http://www.scopus.com/inward/record.url?scp=85147440451&partnerID=8YFLogxK
U2 - 10.1016/j.red.2022.12.005
DO - 10.1016/j.red.2022.12.005
M3 - Article
AN - SCOPUS:85147440451
SN - 1094-2025
VL - 51
SP - 177
EP - 198
JO - Review of Economic Dynamics
JF - Review of Economic Dynamics
ER -