Estimating Lost Output from Allocative Inefficiency, with an Application to Chile and Firing Costs

Abstract

We propose a new measure of allocative eciency based on unrealized increases in aggregate productivity growth. We show that the dierence in the value of the marginal product of an input and its marginal cost at any plant - the plant-input - is exactly equal to the change in aggregate output that would occur if that plant changed that input’s use by one unit. The mean absolute gap across plants for any input can then be interpreted as the gain to society that would occur if every plant had a one-unit change in that input in the ecient direction, holding everything else constant. We show how to estimate this average gap using plant-level data from Chilean manufacturing from 1982-1994, a sector largely viewed as being one of South America’s least distorted. We nd the gaps for blue and white collar labor are quite large in absolute value and increasing over time, and that a one-unit move in the correct direction for blue collar would increase aggregate value added by almost 0.5%. We nd the gap for materials is small and the gap for electricity non-neglible but not