Research

Job Market Paper:  Intra and inter-industry misallocation and comparative advantage (Paper / Slides)

What are the implications of allocative inefficiency in an open economy? Resource misallocation can create a “pseudo” comparative advantage. First, sectors with a larger extent of intra-industry factor misallocation face larger productivity losses, which reduce their relative export capability. Second, if the average inputs’ marginal returns vary across sectors, suggesting the presence of inter-industry factor misallocation, industries’ sizes and sectoral productivity can be distorted through firms’ selection effects, affecting comparative advantage too. After presenting evidence on how usual metrics of factor misallocation are related to the observed patterns of comparative advantage, this paper explores the full set of general equilibrium effects of both types of allocative inefficiency in an open economy and their role shaping industries’ export capabilities. For this, I use a tractable model of international trade with endogenous selection of heterogeneous firms, in which the allocation of factors within and across industries is inefficient. I compute a counterfactual equilibrium in which misallocation is removed in one of the countries (Colombia). Results suggest that the reallocation of factors allows Colombia to specialize in industries with efficient comparative advantage, leading to a substantial change in its industrial composition. This effect, mainly driven by the adjustments in the extensive margin, is absent in the workhorse models of factor misallocation under closed economies.

 

Barriers to Mobility or Sorting? Sources and Aggregate Implications of Income Gaps across Sectors and Locations in Indonesia (with Tomasz Święcki)

Existence of large income gaps between agricultural and non-agricultural workers in developing countries is well known, but the exact source of the gaps is debated. The two main hypotheses, barriers to labor mobility and sorting of workers based on unobserved comparative advantage, have distinct predictions for aggregate efficiency but are difficult to distinguish using only cross- sectional data typically available for developing countries. We use panel data from Indonesia Family Life Survey to document that workers who move out of agriculture see an income gain of around 20% while those who move into agriculture see a similar income loss, even if they stay in the same location. These premia are difficult to reconcile with efficient sorting of workers and suggest a presence of substantial barriers to mobility. Without controlling for individual heterogeneity the income premia are even larger, suggesting that some sorting is taking place as well. To evaluate the contribution of barriers to mobility and sorting to the observed income gaps more clearly, we are working on developing a model of sectoral and migration decisions.