06 Efficiency Flashcards
Other than technology, A can also represent _____
Other than technology, A can also represent how efficient we are in using the factors of production (workers & capital).
- Missing or perverse incentives
- Lack of competition.
- Corruption. Institutions.
- Culture.
Decomposing efficiency and technology
Types of inefficiency
- Unproductive activities.
- Idle resources.
- Misallocation of factors across sectors.
- Misallocation of factors across firms.
- Technology blocking.
Unproductive activities
- Theft, smuggling, civil war.
- E.g. Angolean civil war 1975-2002. GDP/capita lower in 2002 than 1974.
- Rent seeking:
- Activities (e.g., lobbying) to increase one’s share of existing wealth without creating wealth.
- E.g. efforts to obtain subsidies by bribery, lobbying etc.
- Lower output/capita, poor allocation of resources, lost government revenue, increased income inequality.
idle resources
- Unemployment
- Overstaffing / underemployment
- ..of labor and capital
Misallocation of factors across sectors
Overallocation in Sector 1 due to e.g.
- Distortions in wages/prices (e.g., w1 > MPL1).
- Barriers to mobility (geographic, regulatory).
Huge potential for productivity improvement from more efficient allocation:
- Reallocation from low to high MPL industries in Taiwan & South Korea (1960-1990). Agriculture to manufacturing.
- China today.
- Geographic mobility from poor to rich areas.
- Sectoral mobility from agriculture to manufacturing.
- Agricultural employment share down from 69% to 40% (1980-2008).
Misallocation of factors across firms
- Enormous heterogeneity in productivity across firms within an industry.
- 100% productivity spreads between 10th and 90th percentile firms within same homogeneous industry, e.g. cement (Foster, Haltiwanger and Syverson, 2008).
- In a market economy, high A firms will employ a larger share of inputs.
- Sources of misallocation:
- Collusion between high and low productive firms.
- Subsidies, export quotas etc.
- Monopoly / lack of competition.
- Misallocation causes too much resources (labor and capital) to be used in low productivity activities.
- Removing frictions can give large gains.
- Manufacturing productivity ↑ 25-40% (China) and 50-60% (India) if misallocation ↓ to U.S. level (Hsieh and Klenow, 2009).
Technology blocking
If someone prevents the use of new technology.
Insiders may lose from adoption of new technology. Examples:
- Gutenberg’s printing press vs scribes.
- The printing press delayed 20 years in Paris.
- Railroads vs owners of canals, turnpikes and stagecoaches in 1st half of the 19th century.
- Microsoft vs Netscape.
- New technologies threatened Microsoft’s Windows monopoly.
- Microsoft paid ISP’s not to distribute the Netscape browser.
So far, we have analyzed sources of inefficiency in the real economy. But the extent of misallocation between sectors/firms also depends on ____
So far, we have analyzed sources of inefficiency in the real economy. But the extent of misallocation between sectors/firms also depends on the performance of the financial system. Banks, pension funds, insurance companies, equity markets, bond markets.
The role of finance:
The role of finance:
- Direct capital to the highest return activities.
- Convert savings into large investment projects.
- Spread risk.
- Increase liquidity and speed up transactions.
Zombie banks
- Japan after bursting of Japanese asset price bubble in 1991.
- Insolvent banks kept alive by government support (zombie banks).
- Banks continued to lend to otherwise insolvent firms (zombie firms).
- If calling in nonperforming loan, the banks would have to write off existing capital −→ pushed up against minimum capital levels.
- Instead, rolling over loans and hoping firms would recover.
- Misdirected bank lending → misallocation of labor and capital → productivity loss.
- Explains Japan’s “lost decade(s)”?
Solow model with exogenous growth in productivity
Appendix Ch8
