TY - JOUR AU - Restuccia, Diego AU - Rogerson, Richard TI - The Causes and Costs of Misallocation JF - National Bureau of Economic Research Working Paper Series VL - No. 23422 PY - 2017 Y2 - May 2017 DO - 10.3386/w23422 UR - http://www.nber.org/papers/w23422 L1 - http://www.nber.org/papers/w23422.pdf N1 - Author contact info: Diego Restuccia Department of Economics University of Toronto 150 St. George Street Toronto, ON M5S 3G7 CANADA Tel: 416/978-5114 Fax: 416/978-5519 E-Mail: diego.restuccia@utoronto.ca Richard Rogerson Department of Economics JRR Building Room 292 Princeton University Princeton, NJ 08544 Tel: 609-258-4839 Fax: 609-258-5349 E-Mail: rdr@princeton.edu AB - Why do living standards differ so much across countries? A consensus in the development literature is that differences in productivity are a dominant source of these differences. But what accounts for productivity differences across countries? One explanation is that frontier technologies and best practice methods are slow to diffuse to low income countries. The recent literature on misallocation offers a distinct but complementary explanation: low income countries are not as effective in allocating their factors of production to their most efficient use. We provide our perspective on three key questions. First, how important is misallocation? Second, what are the causes of misallocation? And third, beyond the direct cost of lower contemporaneous output, are there additional costs associated with misallocation? A summary of our answers is as follows. Misallocation appears to be a substantial channel in accounting for productivity differences across countries, but the measured magnitude of the effects depends on the approach and context. Researchers have not yet found a dominant source of misallocation; instead, many specific factors seem to contribute a small part of the overall effect. Beyond the static cost of misallocation, we believe that the dynamic effects of misallocation on productivity growth are significant and deserve much more attention going forward. ER -