Thursday, November 21, 2013

Is France less distorted than we think?

When you think about market distortions through regulation and taxation in a developed economy, you think first about France. It is the prime example of how excessive government intervention can lead to disincentives for production and to major misallocations of resources across firms and sectors. This all accepted wisdom, except nobody actually measured the misallocation part.

Flora Bellone and Jérémy Mallen-Pisano do this using the Chang-Tai Hsieh and Peter Klenow methodology which consists of using a model of firms heterogeneous in their use of capital, labor and technology. Taking this to data, distortions in the use of factors at the firm or the sector level translate into lower aggregate total factor productivity. Hsieh and Klenow showed that there were massive distortions in China and India relative to the USA. Bellone and Mallen-Pisano show that for France, there are no more distortions that in the United States. Thus, there are no misallocations across firms or sectors, but it remains that there can still be a uniform misallocation across the entire economy, say, because of distortions on the labor market applying equally to all firms.

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