Misallocating Misallocation?

The macrodevelopment literature on misallocation quantifies aggregate productivity losses resulting from microeconomic distortions, relative to a first-best benchmark. However, sources of these distortions are often insufficiently explored. The microdevelopment literature in contrast provides evidence of distortions resulting from market failures owing to asymmetric information, missing markets, transaction costs, and limited state capacity, often without examining the resulting macrolevel consequences. If distortions result from such market failures rather than policies, second-best welfare-improving policies may aggravate productive misallocation. We illustrate these points in the context of manufacturing, agriculture, and rural-urban allocation of labor and land. Hence future research should devote more effort to identifying the source of distortions and using appropriate benchmarks for welfare going beyond productivity.