JOB MARKET PAPER:
Micro-Level Misallocation and Selection: Estimation and Aggregate Implications
Paper Appendix

How large are aggregate productivity losses from misallocation of resources across firms? Existing estimates of these losses based on plant-level microdata typically take the set of firms as being fixed. As a result, only intensive-margin misallocation is considered: some firms are too large and others are too small relative to a frictionless equilibrium. However, if firm exit is endogenous, micro-frictions can induce extensive-margin misallocation: inefficient firms continue to survive (Zombies) and efficient firms are forced to exit (Shadows). I develop and estimate a fully-specified model with plant-level micro-data to quantify extensive-margin misallocation. This method allows me to identify Zombie firms, estimate the efficiency distribution of Shadow firms and calculate macroeconomic TFP gains when Zombies are replaced by Shadows. Estimates for Indonesia show that extensive-margin misallocation can increase aggregate TFP losses from micro-distortions by over 40%. Compared to existing estimates, aggregate TFP losses from micro-distortions are 50-100% higher.