Baqaee, D. and Farhi, E. (2020). Productivity and Misallocation in General Equilibrium. Quarterly Journal of Economics.









Abstract
This paper develops a general theory of aggregation in inecient economies. We
provide non-parametric formulas for aggregating microeconomic shocks in economies
with distortions such as taxes, markups, frictions to resource reallocation, financial
frictions, and nominal rigidities. We allow for arbitrary elasticities of substitution,
returns to scale, factor mobility, and input-output network linkages. We show how
to separately measure changes in technical and allocative eciency. We also show
how to compute the social cost of distortions. We pursue applications focusing on
firm-level markups in the U.S. We find that improvement in allocative eciency, due
to the reallocation over time of market share to high-markup firms, accounts for about
half of aggregate TFP growth over the period 1997-2015. We also find that eliminating
the misallocation resulting from the large and dispersed markups estimated in the
data would raise aggregate TFP by about 15%, increasing the economy-wide cost
of monopoly distortions by two orders of magnitude compared to the famous 0.1%
estimate by Harberger (1954). These exact numbers should be interpreted with care
since the data is imperfect and requires substantial imputation.