The Causes and Costs of Misallocation by Diego Restuccia and Richard Rogerson pyblished by Journal of Economic Perspectives (2017).
“Why do living standards differ so much across countries? This is one of the long-standing questions in economics. A consensus in the development literature is that differences in productivity are a large, if not necessarily the dominant, source of these differences: that is, even after adjusting for differences in the quantity and quality of factors of production such as capital and labor, poor countries produce much less output per worker than rich countries, and this difference accounts for much of the variation in income per capita across countries.1 But what accounts for productivity differences across countries? One explanation is that frontier technologies and best practice methods are slow to diffuse to low-income countries. The recent literature on misallocation, which is the focus of this article, offers a distinct but complementary explanation: low-income countries are not as effective in allocating their factors of production to their most efficient use…”