What's in a wedge? Misallocation and taxation in the oil industry

Abstract

Resource misallocation explains a large part of cross-country productivity differences. Measuring differences in marginal revenue products of labor and capital across countries and firms allows for a quantification of the extent of this misallocation, but is typically uninformative of its source. We address this problem by using novel, firm-level data from the oil industry. We confirm the existence of sizeable gaps in marginal revenue products across countries and firms relative to the US, but show that these disappear once we account for revenue taxation. Differences in tax policies are thus sufficient to account for cross-country gaps in marginal products.