Rounding error and misallocation

Abstract

National audienceMeasurement error poses a challenge to measuring misallocation. Using Chinese manufacturing data (1998–2007), we exploit rounding — a directly observable form of measurement error — in firms’ reported labor, capital, and value added. The share of values ending in zero exceeds 20% for each variable, more than double the 10% uniform benchmark. Within industry-year cells, the standard deviation of log labor productivity is 0.021 higher among firms whose reports end in zero than among firms ending in other non-rounding digits, with a sharply larger differential in small-firm industries. At the aggregate level, including rounded observations lowers estimated allocative efficiency by 1.6 percentage points