Why Does Misallocation Persist?

TLDR

Misallocation of resources is argued to explain large cross‑country TFP differences, supported by evidence of substantial dispersion in marginal products, especially capital, in developing countries. The study asks why misallocation, particularly of capital, persists and why distortions do not self‑correct, and it discusses theories of persistent misallocation. A simple capital‑accumulation model with credit constraints illustrates the persistence of capital misallocation. Intensive‑margin misallocation tends to disappear asymptotically under general conditions, whereas extensive‑margin misallocation may persist. JEL codes: D24, E22, G31, G32, L26.

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. (JEL D24, E22, G31, G32, L26)