Document Type

Discussion Paper

Publication Date

1-5-2026

CFDP Number

2482

CFDP Pages

98

Journal of Economic Literature (JEL) Code(s)

O11, O12, D24, E23

Abstract

This chapter, prepared for the Handbook of Development Economics (Vol. 6), reviews recent microeconomic evidence on the causes of resource misallocation in developing countries. It distinguishes between “technological” and “distortionary” wedges, develops a unified theoretical framework linking market power, taxes, financial frictions, and firm dynamics, and summarizes empirical findings from the “direct approach” to misallocation. The authors emphasize how wedges vary by firm size and discuss policy implications for improving allocative efficiency.

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