Misallocation and intersectoral linkages

We analytically characterize the aggregate productivity loss from distortions in presence of sectoral production linkages and show key role input substitutability. analyze various forces behind non-monotonic effect substitutability on loss. then use second-order approximation to find that for moderate distortions, low reduces intermediate-input suppliers. Moreover, when elasticity substitution is low, do not systematically amplify Using model calibrated industry-level data 35 countries, we insights obtained are relevant context caused by market power, even with large observed data. In particular, using Cobb-Douglas functions (unit elasticities) instead accounting (less-than-one leads overestimating a factor 1.8.