40 B o o s t i n g
P r o d u c t i v i t y i n S u b - Sa h a r a n A f r i ca
BOX 3.1 Resource Misallocation: Theoretical Underpinnings Resource misallocation refers to distortions in the allocation of inputs (capital, land, and labor, among others) across production units of different sizes. This misallocation typically occurs when the different production establishments are taxed at different rates. This strand of the literature assumes that aggregate output is produced by several producers (N) with different levels of productivity (A i). Firm i’s technology is summarized by a production function (f ) that is strictly increasing and strictly concave. There is a fixed cost of operation (c) for any producer. Given an aggregate demand of labor (H) and capital (K), there is a unique allocation of labor and capital across producers that maximizes total output net of fixed operating costs. According to this framework, lower values of A i reflect either slow adoption or inefficient use of technology. The efficient allocation in this economy maximizes final output and is characterized by two decisions: (a) the number of operating establishments (that is, establishments that can pay the fixed cost, c); and (b) the allocation of capital (K) and labor (H) across the operating establishments. If either of these decisions is distorted, the economy will have lower output and hence lower aggregate total factor productivity (TFP)—because the aggregate factor inputs (K and H) in the industry are constant. The allocation of inputs that maximizes output across production units (say, either firms or farms) takes place when, conditional upon their operation, the marginal (and average) products are equal across all production units. In this equilibrium, no output gains would be acquired by reallocating inputs of production (say, capital, land, and labor) from production units with low marginal products to those with high marginal products. In the efficient allocation, the most productive operating establishments will demand a greater amount of inputs. In other words, a production unit’s productivity and size are positively associated in the efficient allocation. In addition, production units with similar levels of productivity command the same amount of inputs and are of identical size. Deviations from the efficient allocation of resources across firms may have implications on aggregate output and productivity. Input choices that are different from the efficiency model, even if they allocate more factors to the more-productive
production units, will generate lower aggregate output. Given the constant aggregate amount of inputs (say, capital, land, and labor), the output loss associated with an inefficient allocation is also an aggregate TFP loss. In this context, misallocation refers to situations were resources are not allocated efficiently across production units, and the cost of misallocation is typically measured in terms of aggregate output or TFP losses. Theoretically, inefficiencies in the allocation of labor and capital across heterogeneous producers will affect aggregate output and productivity through three different channels: • The technology channel—the higher the productivity for all firms, the greater the output • The selection channel—based on the choice of operating producers • The misallocation channel—based on the allocation of capital and labor among operating producers. These three channels are not independent: any policy or institution that distorts the allocation of resources across producers will potentially generate additional effects through both the selection and technology channels. If the misallocation of resources across these different producers helps explain cross-country differences in aggregate productivity levels, it is then crucial to investigate the sources of misallocation. Resource misallocation across different production units might reflect the following (Restuccia and Rogerson 2017): • Statutory provisions, including some features of the tax code and regulations—for instance, provisions of the tax code that vary with firm characteristics (say, age or size); tariffs targeting certain groups of goods; employment protection measures; and land regulations, among others • Discretionary government (or bank) provisions that favor or penalize specific firms—for instance, subsidies, tax breaks, or low-interest loans granted to specific firms; preferential market access; and unfair bidding practices for government contracts, among others • Market imperfections—for instance, monopoly power; market frictions (such as in credit and land markets); and enforcement of property rights.
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