Spatial Misallocation Across Chinese Firms

We document the spatial variations of firm-level frictions across cities in China and quantify their macroeconomic implications. Larger and centrally-located cities are less distorted in both the output and the factor market. The firm-level frictions lower the aggregate income by 10.5 percent in 2007, and over 50 percent of the welfare cost is due to the spatial dispersion of the frictions. The spatial dispersion of the frictions also increases spatial inequality by around 5 percent, as it suppresses economic activity in small cities.