A simple accounting framework for the effect of resource misallocation on aggregate productivity

This paper develops a simple accounting framework that measures the effect of resource misallocation on aggregate productivity. This framework is based on a multi-sector equilibrium model with sector-specific frictions in the form of taxes on sectoral factor inputs. Our framework is flexible for the assumption on preferences or aggregate production functions. Moreover, this framework is consistent with that commonly used in productivity analysis. I apply this framework to measure the extent to which resource misallocation explains the difference in aggregate productivity across developed countries. I find that around 9 percentage points of the difference in the measured aggregate productivity between Japan and the US can be accounted for by resource misallocation. Using the framework, I also decompose the causes of the misallocation effect.