Factor Market Distortion and Interfirm Productivity Dispersion: Theoretical and Empirical Analysis

Resources misallocation is prominently embodied by continuous and significant productivity dispersion among firms,especially obvious in manufacturing in China. Based on the typical fact of hysteresis of factor marketization reform in China,this paper studies the effect of factor market distortion on interfirm productivity dispersion. After relaxing the exogenous assumption of firm entry and exit in typical models,new theoretical analysis shows that distorted factor prices affect enterprise production behavior and decisions on entry and exit,lower the critical value of the productivity distribution in the market equilibrium,and thus make enterprises with low efficiency survive,leading to the partial failure of market selection mechanism of the survival of the fittest and finally widening interfirm productivity dispersion. Furthermore,based on marketization indexes in China,it estimates price distortion degree of industry factors,and tests the relationship between factor market distortion and interfirm productivity dispersion by using the data of manufacturing enterprises in China Industrial Enterprise Database from 1998 to 2007. It concludes that the reduction in factor market distortion index by 1% leads to the decrease in interfirm productivity dispersion by 0.46%. It is of great policy significance to the correction of factor market distortion,the formation of market-oriented factor price mechanism and thereby the promotion of effective interfirm competition to achieve the optimization of resources distribution.