Inequality and Misallocation under Production Networks - Job Market Paper

In this paper, I develop an aggregation theory for distorted production network economies with heterogeneous households. I provide general decompositions for how the aggregate and distributional effects of shocks are sensitive to underlying consumer and firm heterogeneity. The workers’ value-added over labor income ratios (distortion centralities) gauge the importance of workers in the production of heavily distorted firms and are sufficient statistics for the effect of income distribution variations on TFP. The average distortion centrality faced by a household’s expenditure (expenditure centrality) and a firm’s revenue (revenue centrality) are sufficient statistics for the effect of expenditure variations on TFP. Labor misallocation rises and TFP falls as labor income shifts toward high distortion centrality workers, consumption shifts toward high expenditure centrality households, or demand shifts toward high revenue centrality firms. The reason is that when aggregate expenditure on relatively undistorted firms rises, their labor demand increases, reallocating workers from distorted firms with high marginal productivity to relatively undistorted firms with low marginal productivity. These second-best results show how distributional variations affect aggregate output by changing the aggregate allocation efficiency of workers. I estimate the first production network model with household heterogeneity for the United States. I show that variations in the income distribution have been responsible for 20% of the TFP volatility. Additionally, income distribution variations reduced misallocation between 2001 and 2009, and accentuated misallocation after the Great Recession. Heterogeneities in the production network are essential in explaining income and real consumption inequalities.

  • 2023
  • North American Summer Meeting of the Econometric Society
  • Asian Meeting of the Econometric Society
  • Australasia Meeting of the Econometric Society
  • Canadian Economic Association Conference
  • Lacea Lames 2023
  • Universidad del Rosario
  • Labor, Firms, and Macro Reading Group
  • Banco de La Republica
  • 2024
  • ASSA 2024
  • University of Hawai’i at Manoa
  • Universidad Diego Portales
  • Bank of Canada
  • Teconlogico de Monterrey
  • Fundacao Getulio Vargas - Sao Paulo
  • Tilburg University
Stairway To Haven
This paper attempts to identify the main channels for the propagation of the macroeconomic effects from corporate profit shifting into tax havens. This question is answered by building a general equilibrium model that introduces firm profit shifting to tax havens in a multi-country environment with production networks. In this model, haven jurisdictions specialize and compete for shifted profits by trading concealment assets in a differentiated oligopolistic environment, and non-haven countries defend these profits by setting enforcement levels over capital flows. The central point of the model is that profit shifting introduces two classes of optimal distortions, first, rebated distortions that by modifying the terms of trade and the effective marginal tax rate alter the decision of firms, but also wasted distortions that optimally squander resources via enforcement policies and the corporate costs that firms have to incur in order to access and develop concealment strategies. I show that the main transmission channels for the propagation of these distortions occurs by increasing corporate dividends, the tax base, and wages in tax havens; while non-haven countries are affected by opposite effects in addition to the wasted distortions. We confirm these results in a three country one sector global economy that additionally provides evidence about the relevance of the structure of the production network and the consumption bundle in the magnitude of the effect from introducing profit shifting.