Economic growth of cities: Does resource allocation matter?

TL;DR

This paper analyzes how optimal resource reallocation across Chinese cities can significantly boost aggregate economic output, highlighting the importance of efficient resource distribution for growth.

Contribution

It introduces a quantitative framework to measure the impact of resource misallocation and demonstrates potential gains from nationwide and local reallocations in China.

Findings

Reallocating resources could increase aggregate output by over 1.3 times.

City-level adjustments yield substantial additional gains.

Nationwide resource reallocation has greater potential than local adjustments.

Abstract

We study how efficient resource reallocation across cities affects potential aggregate growth. Using optimal resource allocation models and data on 284 China's prefecture-level cities in the years 2003--2019, we quantitatively measure the cost of misallocation of resources. We show that average aggregate output gains from reallocating resources across nationwide cities to their efficient use are 1.349- and 1.287-fold in the perfect and imperfect allocation scenarios. We further provide evidence on the effects of administrative division adjustments and local allocation. This suggests that city-level adjustments can yield more aggregate gain and that the output gain from nationwide allocation is likely to be more substantial than that from local allocation. Policy implications are proposed to improve the resource allocation efficiency in China.