Misallocation, productivity and fragmentation of production: the case of Latvia

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Abstract

This paper evaluates misallocation of resources in Latvia during 2007–2014 using firm-level data. I find that misallocation of resources increased before 2010 and declined afterwards. Initially, output distortion was the major source of misallocation, while the importance of capital distortions increased after the financial crisis. Determinants of changes in allocation efficiency may include growing competition in domestic markets, tighter credit supply and legal issues. However, I show that fragmentation of production induces bias to the estimates of firm-specific distortions, leading to the overestimation of gains from reallocation. Thus, in the absence of inter-firm trade data, the conclusions on misallocation should be treated with caution.

Keywords

Misallocation Fragmentation Productivity Firm-level data Latvia 

JEL-codes

D24 L11 O11 O41 O47 

Notes

Acknowledgements

This research was performed within the ESCB Competitiveness Research Network (CompNet). I am grateful to Richard Baldwin, Fabrizio Coricelli, Carlos Robalo Marques, Sašo Polanec and two referees for helpful comments.

Compliance with ethical standards

Conflict of interest

The author declares that they have no conflict of interest.

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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Monetary Policy DepartmentLatvijas BankaRigaLatvia
  2. 2.Stockholm School of Economics in RigaRigaLatvia

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