Growing Pains: Inefficient Resource Allocation in Emerging Economies

ABSTRACT This paper investigates how economic catch‐up shapes resource allocation in emerging economies. I develop a model that features firm‐specific technology adoption and costly adjustment of production factors. Rapid technological progress during catch‐up creates strong demand for reallocating resources from slow to fast adopters, amplifying the consequences of adjustment costs. The amplification fades as technological change gradually slows during convergence to a more advanced and efficient steady state. I evaluate the model using Chinese and German enterprise data and find that differences in development stage account for at least 40% of their labour allocative efficiency gap.