Tasso Adamopoulos, York University; Loren Brandt and Diego Restuccia, University of Toronto; and Jessica Leight, Williams College

Misallocation, Selection and Productivity: A Quantitative Analysis with Panel Data from China

Adamopoulos, Brandt, Leight, and Restuccia use micro panel data from China and a quantitative framework to document the extent of resource misallocation in agriculture within villages, across villages, and over time; and to assess the total factor productivity (TFP) gains from an efficient reallocation of resources. The researchers then develop and estimate a tractable heterogeneous-ability two-sector framework of agriculture and non-agriculture to assess the TFP implications of distortions with ability selection across sectors. An efficient reallocation of capital and land to existing farmers in China would increase output and productivity by 84 percent. Resource misallocation in agriculture implies substantial distortions in occupational choices. Eliminating misallocation across farms in agriculture generates substantial reallocation across sectors, increasing average ability in both sectors but especially in agriculture, and generating a large impact in aggregate outcomes.