Information, Misallocation and Aggregate Productivity

We explore the implications of imperfect information about firm-level fundamentals for the misallocation of factors of production across heterogeneous firms and the consequences for aggregate productivity and output. In our setup, firms learn from both private sources and stock market prices, the latter determined in a noisy rational expectations model of asset markets. We devise a novel calibration strategy that uses a combination of crosscountry stock market and firm-level production data to pin down the information structure in the economy and apply it to data from the US and two emerging market economies China and India. We find that significant productivity and output losses due to informational frictions are substantial even when only one of the factors (namely, capital) is affected by the friction. Our estimates for these losses range from 8-16% for TFP and 1224% for GDP in India and China. The numbers are even higher when labor decisions are also made under imperfect information. We also find that learning from financial markets contributes little to overall allocative efficiency. Preliminary and Incomplete Not for General Circulation ∗. †[email protected]. ‡[email protected] §[email protected]