Impact of Structural Distortions on Resource Allocation in China: Evidence from an Innovative Empirical Model

Abstract This paper examines the impact of structural distortions on resource allocation among industries, regions (provinces), and ownerships in China, using data from 2003 to 2019. This paper innovatively develops an empirical model to measure multi-dimensional structural distortions and assesses the resource misallocation degrees regarding industries, regions, and ownerships. The results indicate that China’s most serious resource misallocation is related to industries, followed by regions and ownerships, and the most severe capital misallocation is associated with ownership, and labor misallocation exists in industries. The present study contributes to the literature by creating an innovative two-layer empirical model to address the limitations of Hsieh and Klenow’s model. The findings have identified which group (industry, region, and ownership) is excessive or insufficient in resource usage, and the results have profound policy and practical implications.