Aggregate productivity losses from factor misallocation across Chinese manufacturing firms

Aggregate productivity can be largely determined by how efficiently production factors are allocated across heterogeneous establishments. This paper estimates aggregate productivity losses from factor misallocation using a large sample of Chinese manufacturing firms. We analyze the institutional background and provide some stylized facts on factor misallocation of capital and labor in China. Using an approximation method based on the estimation of input gaps, we find that aggregate productivity losses reach an average rate of 11.18 percentage points per year. On average, capital and labor misallocation account for 6.73 and 4.45 percentage points, respectively. State ownership plays an important role in generating factor misallocation and productivity losses. Our results imply that factor misallocation have become a major obstacle preventing China from moving to a more efficient economy.