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School of Economics and Finance Seminar Managing Resource (Mis)allocation

Speaker: Dr Rui Silva, Nova School of Business and Economics

Abstract: Prior work has shown that the misallocation of capital and labour substantially lowers aggregate productivity. In this paper, we use Census microdata at the plant level to decompose how much aggregate productivity is lost due to misallocation across firms and how much is lost because of misallocation within firms. When capital and labour are hypothetically reallocated to equalize marginal products across all plants, we find an increase in aggregate productivity of 42%, out of which 30% is due to misallocation within firms. Managerial quality explains a large part of the efficiency of internal capital and labour markets. In a counterfactual where all multi-unit companies are assigned the highest management score, aggregate productivity increases by 13% due to improvements in the allocation of internal resources. To ensure that our results are not driven by mismeasurement, we exploit the introduction of new airline routes that reduce the travel time between the headquarters' ZIP code and the plant's ZIP code. We further document that companies that misallocate resources internally have lower profits and lower value.

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