Misallocation or Measurement Error: Evidence on Vietnam’s Agriculture
Tram Hoang, Songqing Jin, Klaus Deininger, Hai-Anh Dang
We examine misallocation by investigating how measurement errors in output and inputs affect the estimation of agricultural productivity loss associated with resource misallocation. We find that measurement errors account for a substantial part of the estimated total factor productivity (TFP) variations (30-45% at the national level). Correspondingly, failing to account for measurement errors would considerably overestimate the gains from resource reallocation. Based on the preferred Two-Stage least squares (2SLS) estimation of the production function, measurement errors in both output and inputs will lead to an overstatement of production gains by 2-3-fold if not adjusted in productivity estimation. The results are consistent regardless of whether the analysis is explored by analyzing household productivity variation across years or across households within local communes. The findings caution against relying on estimates unadjusted for measurement error of potential gains from reallocation in cost-benefit analysis of reallocation. Certain caveats and assumptions of the analysis are discussed in the paper.
Event: World Bank Land Conference 2024 - Washington
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