Macroeconomics Seminar - Yan Liang (Deakin University)

Room 315, Level 3, FBE Building, 111 Barry Street, Carlton

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Lawrence Uren

luren@unimelb.edu.au

T: +61 3 83447915

Title: Imperfect Competition and Misallocation

Abstract: This paper studies the e ect of variable markups on misallocation and aggregate productivity using the manufacturing data from India. Three main findings are presented. First, markup dispersion is an important source of misallocation. Such dispersion accounts for approximately one third of the misallocation observed in the economy. Due to the endogenous response of markups, removing non-markup distortions has only a modest impact on misallocation and aggregate productivity. Second, models with CES preferences and constant markups substantially overstate productivity gains. TFP gain implied by a CES model is nearly six times the TFP gain when variable markups are taken into account. Third, competition policies that reduce barriers of entry can reduce markup distortions and enhance aggregate productivity.