Management and Misallocation in Mexico

III.3 Misallocation and Output Losses 
How much does misallocation matter? We consider a simple semi-parametric re-weighting 
approach in the style of DiNardo, Fortin, and Lemieux (1996, “DFL”). Imagine a 
24
The description of how exit is defined and the characteristics of exit between the two waves of the survey are 
shown in Online Appendix Figure A2. 
25
These results are robust to including labor productivity and management simultaneously (e.g. the coefficient 
on management in column (1) falls from 0.16 to 0.12, but remains highly significant) and alternative definitions 
of exit. 

---

13 
counterfactual where we “assign” to firms in the services sector the same degree of 
reallocation as Mexican manufacturing by fixing the firm management score distribution, but 
reallocating job shares across this distribution to the same extent as exists in manufacturing. 
Intuitively, since more employment is allocated to the relatively better-managed firms in the 
sector, this will raise the size-weighted average management score.
To implement this, we split the services sector into twenty quantile bins and calculate the 
fraction of employment in the twenty quantiles of the manufacturing firm distribution. The 
unweighted mean management in the service sector is 0.446, which rises to 0.520 when 
weighted by firm employment size in services. The difference of 0.074 shows substantial 
reallocation towards better-managed firms in the service sector, albeit less so than in 
manufacturing.
26
Re-weighting by manufacturing shares implies an increase in the weighted 
management score in services of 0.039 (from 0.520 to 0.559). Using results from column (1) 
of Table 1, such an increase of management is associated with an increase in labor 
productivity of 4.5% or (using the last column of Table 1) an increase in TFP of 2.2%. These 
might seem like small amounts, but consider that the GDP of the Mexican service sector was 
US$762 billion in 2019. This implies a growth in output of between $34.2 and $16.7 billion 
due to reallocation, which is non-trivial.