Session 15: Causes and Consequences of Misallocation: Theory and Empirics

The efficient allocation of resources across firms and sectors is crucial for aggregate productivity and economic growth. In an ideal world without frictions, resources would flow to their most productive uses, but what happens when there are barriers to this efficient reallocation? Firms can face constraints in accessing capital, technology, or skilled labor, or when distortionary policies create wedges in marginal products across firms. Furthermore, the persistence of productivity differences across countries suggests that misallocation may be a key driver of development gaps. How do various market frictions and policy distortions contribute to resource misallocation, and what are their quantitative implications for aggregate productivity? This session will bridge theoretical frameworks with empirical evidence, combining insights from firm dynamics, finance, and macroeconomics to deepen our understanding of how misallocation shapes economic performance and what policies might help address it.