This paper decomposes the regional effects of resource misallocation on aggregate total factor productivity (TFP), as a variant of the Hsieh and Klenow (2009a) model. Using establishment level data from the 2004 Mexican Economic Census, I calculate the potential regional TFP gains in...

Growth theory has traditionally assumed the existence of an aggregate production function, whose existence and properties are closely tied to the assumption of optimal resource allocation within each economy. We show extensive evidence, culled from the micro-development literature, demonstrating...