Job Market Paper: Intra and inter-industry misallocation and comparative advantage
What are the implications of allocative inefficiency in an open economy? This paper shows how firm-level resource misallocation can affect the relative unit cost of producing a good across sectors, distorting the “natural” comparative advantage of a country. First, sectors with a larger extent of within-industry factor misallocation face larger productivity losses, which reduce their relative export capability. Second, misallocation of factors across industries can alter sectors’ sizes and distort their average productivity through firms’ selection effects, affecting their comparative advantage too. After presenting evidence on how metrics of intra- and inter-industry factor misallocation are related to the observed patterns of comparative advantage, this paper explores the general equilibrium effects of both types of misallocation in an open economy and their role in shaping industry export capabilities. For this, I use a 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 in capital, skilled labor and unskilled labor is removed in one of the countries (Colombia). The reallocation of factors allows Colombia to specialize in industries with “natural” comparative advantage, and generates a substantial change in its industrial composition, which leads to a rise in the ratio of exports to GDP by 18 p.p. This industrial composition effect 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 costs of switching across industries. 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 switching costs and sorting to the observed income gaps more clearly, we develop a structural model of sectoral decisions. We find significant switching costs that misallocate workers across sectors, which imply income losses of around 15% for misallocated workers. Although reallocating workers generates a sizable change in the sectoral choice distribution, it has a moderate impact (1.4%) on the aggregate income.