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Keiko Ito and YoungGak Kim

Ito and Kim use a large-scale dataset to examine differences in allocative efficiency between Japanese and Korean firms from 1995 to 2008. They measure the firm-level distortions in terms of total factor productivity, output and capital, employing the Hsieh and Klenow approach. They find that distortion measures are more dispersed in Korea than in Japan. As a result, neither economy has improved allocative efficiency, which is lower for Korea than for Japan. Low productivity firms in both economies tend to overproduce, suggesting that resources are not moved from low productivity firms to high productivity firms. Improvement in resource allocation is an urgent policy issue for both countries in order to realize the efficient level of output, given that both countries are highly likely to face serious labor shortages in the near future due to population decline and aging.