Resource misallocation explains a large part of cross-country productivity differences. Measuring gaps in marginal products of labor and capital across countries and firms allows for a quantification of the extent of this misallocation. However, it is typically not informative on the source of the misallocation. We address this problem by using novel data from the oil industry to pin down both, the extent and the source of misallocation in the rest-of-the-world versus the United States. We confirm the existence of sizeable gaps in marginal products across production units, but show that these disappear once we account for direct taxation. This provides strong evidence that gaps in marginal products – and hence productivity – are largely driven by differences in tax policies rather than more indirect distortions. Joint with Gerhard Toews.

JEL codes: O4, H2, D61, Q3, O10
Keywords: Misallocation, Taxation, Wedges, Oil