Sophie Osotimehin, Professor, University of Quebec in Montreal
Abstract: We analytically characterize the aggregate productivity loss from distortions in the presence of sectoral production linkages. We find that accounting for low input substitutability reduces the productivity loss and the impact of intermediate-input suppliers. Moreover, with elasticities below one (i.e. below Cobb-Douglas), sectoral linkages do not systematically amplify the productivity loss. We quantify these effects in the context of the distortions caused by market power, using industry-level data for 35 countries. With our benchmark calibration, the median aggregate productivity loss from industry-level markups is 1.2%; assuming Cobb-Douglas elasticities would lead to overestimating the productivity loss by a factor of 1.8.