Working Paper: Misallocation of Resources in Latvia: Did Anything Change During the Crisis?
Working Paper 5/2015
This paper evaluates misallocation of resources in Latvia during 2007–2013 using firm-level data. I found that allocation of resources worsened before 2010 and improved afterwards. Initially, misallocation of intermediate inputs was the major source of aggregate TFP losses, while the importance of capital misallocation increased after the financial crisis. Determinants of changes in allocation efficiency may include growing competition in domestic markets, tighter credit supply and legal issues. However, I show that fragmentation of production induces bias to the estimates of firm-specific distortions. Thus, in the absence of inter-firm trade data, the conclusions on misallocation should be treated with some caution.
Keywords: misallocation, TFP, productivity, firm-level data, Latvia
JEL codes: D24, L11, O11, O41, O47