Misallocation and State Ownership: Evidence from the Russian Sanctions

I use firm panel data and a quantitative framework to document the extent of misallocation in Russia. I find that there are large wedges between state-owned and private firms that prevent labour and capital inputs from flowing to more productive private firms. I quantify the degree of misallocation attributed to state ownership. I find that the aggregate TFP would increase by at least 11% if the wedge between state-owned enterprises and private firms is removed. Using a unique natural experiment of staggered firm-level sanctions, I find one channel through which resources become misallocated between state-owned a private firms: excessive shielding from negative shocks. I find that misallocation grew after the sanctions episode and the Russian TFP dropped at least by 0.33% overall, reaching -3% in some sectors as a combined effect of sanctions and shielding.