Cross-sector misallocation with sector-specific distortions

Abstract

In this paper, I seek to sharpen the understanding of the economic channels through which sector-specific distortions affect aggregate outcomes. I pay special attention on how cross-sector misallocation might arrive as a result of these distortions, and clarify how models of resource misallocation across heterogeneous firms differ from models of resource misallocation across sectors. I present facts that suggest the presence of such distortions in Mexico, a noteworthy developing country. The paper highlights the importance of understanding the origin and nature of sector-specific distortions for policy design.