Misallocation in Firm Production: A Nonparametric Test Using Procurement Lotteries

12/1/2021 10:00 am 12/1/2021 11:00 am Australia/Melbourne Misallocation in Firm Production: A Nonparametric Test Using Procurement Lotteries

Presented by Dave Donaldson, MIT (joint with Paul Carrillo, Dina Pomeranz and Monica Singhal)

Is there misallocation in economic production, as we might expect to result from market power, contracting constraints, taxes, regulations, corruption, or other potential distortions? And if there is misallocation, how severe are its resulting welfare consequences? In this paper we propose a new test for misallocation that is nonparametric in the sense that it does not restrict any firm’s production technology, demand, market structure, or optimizing behavior. We also develop a new procedure to quantify losses from misallocation via a nonparametric instrumental variable random coefficient model. The core idea is to exploit exogenous shocks that induce some firms to alter their input use and then measure the average level of, and cross-firm dispersion 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 which thousands of firms experience exogenous demand shocks (equal to about 50% of annual sales for the median firm) due to a lottery-based assignment of public procurement contracts for construction services in Ecuador. Using monthly data on firm-to-firm transactions and employer-employee payments, a randomization inference version of our test rejects (at standard levels) the null of overall allocative efficiency (AE) but fails to reject the null of AE subject to an aggregate resource constraint in the sector. Misallocation appears to reduce aggregate output among this set of firms by 1% relative to the first-best---roughly half due to an insufficient aggregate use of inputs and half due to cross-firm dispersion in the marginal products of the inputs that are used. Standard parametric assumptions applied to the same setting would suggest losses that are many times larger.

Speaker

Dave Donaldson teaches and carries out research on trade, both international and intranational, with applications in the fields of International Economics, Development Economics, Economic History, Environmental Economics, Urban Economics, and Agricultural Economics. He has studied, among other topics: the welfare and other effects of market integration, the impact of improvements in transportation infrastructure, how trade might mediate the effects of climate change, and how trade affects food security and famine.

This work has been awarded the 2017 John Bates Clark Medal, given by the American Economic Association to the US-based economist “under the age of forty who is judged to have made the most significant contribution to economic thought and knowledge”, as well as an Alfred P. Sloan Research Fellowship and several grants from the National Science Foundation.

He currently serves as a co-editor at Econometrica and previously at American Economic Journal: Applied Economics, and as a program director (for Trade) at the International Growth Centre. He is a Fellow of the Econometric Society and a member of the American Academy of Arts and Sciences. A native of Toronto, Canada, Donaldson obtained an undergraduate degree in Physics from Oxford University and a PhD in Economics from the London School of Economics.

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Event Details

Date:
1 December 2021 at 10:00 am – 11:00 am
Venue:
Online
Categories:
General; SoDa Labs; SoDa Labs Webinars

Description

Presented by Dave Donaldson, MIT (joint with Paul Carrillo, Dina Pomeranz and Monica Singhal)

Is there misallocation in economic production, as we might expect to result from market power, contracting constraints, taxes, regulations, corruption, or other potential distortions? And if there is misallocation, how severe are its resulting welfare consequences? In this paper we propose a new test for misallocation that is nonparametric in the sense that it does not restrict any firm’s production technology, demand, market structure, or optimizing behavior. We also develop a new procedure to quantify losses from misallocation via a nonparametric instrumental variable random coefficient model. The core idea is to exploit exogenous shocks that induce some firms to alter their input use and then measure the average level of, and cross-firm dispersion 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 which thousands of firms experience exogenous demand shocks (equal to about 50% of annual sales for the median firm) due to a lottery-based assignment of public procurement contracts for construction services in Ecuador. Using monthly data on firm-to-firm transactions and employer-employee payments, a randomization inference version of our test rejects (at standard levels) the null of overall allocative efficiency (AE) but fails to reject the null of AE subject to an aggregate resource constraint in the sector. Misallocation appears to reduce aggregate output among this set of firms by 1% relative to the first-best---roughly half due to an insufficient aggregate use of inputs and half due to cross-firm dispersion in the marginal products of the inputs that are used. Standard parametric assumptions applied to the same setting would suggest losses that are many times larger.

Speaker

Dave Donaldson teaches and carries out research on trade, both international and intranational, with applications in the fields of International Economics, Development Economics, Economic History, Environmental Economics, Urban Economics, and Agricultural Economics. He has studied, among other topics: the welfare and other effects of market integration, the impact of improvements in transportation infrastructure, how trade might mediate the effects of climate change, and how trade affects food security and famine.

This work has been awarded the 2017 John Bates Clark Medal, given by the American Economic Association to the US-based economist “under the age of forty who is judged to have made the most significant contribution to economic thought and knowledge”, as well as an Alfred P. Sloan Research Fellowship and several grants from the National Science Foundation.

He currently serves as a co-editor at Econometrica and previously at American Economic Journal: Applied Economics, and as a program director (for Trade) at the International Growth Centre. He is a Fellow of the Econometric Society and a member of the American Academy of Arts and Sciences. A native of Toronto, Canada, Donaldson obtained an undergraduate degree in Physics from Oxford University and a PhD in Economics from the London School of Economics.

SoDa Labs webinar series

The SoDa Labs webinar series provides a platform for researchers around the world to present work that uses novel and alternative data and/or tools from data science and beyond to answer social science questions.

Register now


E-Mail
SoDaLabs@monash.edu