How Large is the Productivity Loss from Misallocation?

This paper compares the productivity loss from product and input market distortions across countries and examines how it is influenced by trade using firm-level data from over 70 countries. Three main results emerge. First, productivity loss from misallocation significantly varies across countries and is strongly negatively correlated with GDP per capita. Misallocation could explain about a quarter of cross-country variation in manufacturing productivity. Second, trade openness reduces the productivity loss from misallocation via reducing between-firm dispersion in markup (or TFPR). Third, the productivity loss from a counterfactual import ban significantly differs across countries and is larger in countries with underdeveloped manufacturing sector than countries such as China