Inequality and Misallocation under Production Networks - New Draft (June 2026)

Redistribution can change aggregate productivity when households’ spending patterns differ in a distorted economy. I develop a heterogeneous-household accounting framework for production network economies in which factor-income, expenditure, and demand reallocations affect TFP through wedge-weighted centralities. The same framework delivers household incidence through positional terms of trade (PTT), whose expenditure-weighted average equals TFP growth. Applying the sufficient statistics to U.S. data, 1997–2021, I find that distributional reallocation explains about 20% of TFP-growth variation. Budget-neutral transfers from high- to low-expenditure-centrality occupations generate modest TFP gains and larger PTT gains for lower-earning workers. Redistribution need not mechanically trade equity for efficiency.