Misallocation in Firm Production: A Nonparametric Test Using Procurement L otteries” with Paul Carrillo (GWU), Dina Pomeranz (U Zurich) and Moni ca Singhal (UC Davis)
Is there misallocation in firm produ ction, as we might expect to result from market power, contracting constrai nts, taxes, regulations, corruption, or other potential distortions? A nd where there is misallocation, how severe are its resulting welfare consequences? In this paper we propose a new test for allocative efficiency of production (AEP) that proceeds without restrictions on firms' prod uction technologies, demand, market structure, or optimizing behavior. We a lso develop a new procedure to quantify losses from misallocation via a nonparametric instrumental variable random coefficient model. Both p rocedures exploit exogenous shocks that induce some firms to alter their in put use and then measure the average level of, and cross-firm dispersi on in, the rate at which firms’ output value increases, on the margin, for a given increase in inputs. We apply these results to a setting in whi ch thousands of firms experience exogenous demand shocks due to lotter y-based assignment of public procurement contracts for construction service s in Ecuador. Using administrative data on these firms, a randomizatio n inference version of our test rejects the null of AEP but the welfar e losses resulting from this misallocation are only 1% relative to the firs t-best. Standard parametric assumptions applied to the same setting wo uld suggest losses that are an order of magnitude larger.
DTSTAMP:20260507T222557Z DTSTART:20220324T163000Z DTEND:20220324T173000Z SEQUENCE:0 TRANSP:OPAQUE END:VEVENT END:VCALENDAR