Efficiency Loss From Resource Misallocation in Soviet Industry

The paper analyzes the problems that arise in estimating the efficiency loss from misallocation of resources in Soviet industry, as revealed by the inequality of marginal rates of substitution among factors in the eight branches of Soviet industry. Econometric estimates of production functions in these branches are utilized to reach estimates of the loss arising from interbranch misallocation of capital and labor deployed in Soviet industry. This loss appears to be nonnegligible, ranging from a low of about 3 to 4 percent to a high of 10 percent of efficient factor use, and to be rising over time. Thus, an added reason for the current deceleration in Soviet industrial (and overall) growth is suggested.