Capital and labor (mis)allocation
Research group: Growth, international trade and competition Research began: 2021 Research ends: 2022 Sponsored by: Prime Minister's Office (VN TEAS funding)

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Capital and labor (mis)allocation

Capital and labor (mis)allocation

Allocation of labor and capital investments has been one of the central questions in economics since Adam Smith’s an Inquiry into the Nature and Causes of the Wealth of Nations. Recently, more attention has been paid to analyses that evaluate the causes and consequences of (mis)allocation. This trend is explained by both the availability of comprehensive plant-level register data sets and more advanced research methods.  There has been large and persistent differences in productivity between firms and plants even within single industry. Studies show that approximately one-half of the productivity gaps in the U.S. manufacturing industry can be explained by the misallocation of labor and capital.

The aim of this project is to provide new insights on the efficiency of allocation of labor and capital, and its evolution over time. The project also examines to what extent different plant-or firm-level characteristics are associated with, e.g., productivity. The results of this project can be used for designing effective policy responses to the issue. One key element to achieve this goal is to examine the (mis)allocation of labor and capital at four different dimensions: establishments, firms, industries and the entire economy.

There may exist (mis)allocation between establishments within the same firm, between firms within the same industry, or even between industries. Therefore, it is important to examine the allocation at many different levels because inefficient allocation, for example, at the firm-level could yield technical inefficiencies at the higher level. At more disaggregated levels (e.g., firms), the inefficiency could be explained by the decisions made by the corporate management. At more aggregated levels, inefficiency may stem from free trade or market entry barriers.

 

Etla implements the project in cooperation with Aalto University, which coordinates the project.

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