Economic growth of cities: Does resource allocation matter?

We study how efficient resource reallocation across cities affects potential aggregate growth. Using optimal resource allocation models and data on 284 China's prefecture-level cities in the years 2003--2019, we quantitatively measure the cost of misallocation of resources. We show that average aggregate output gains from reallocating resources across nationwide cities to their efficient use are 1.349- and 1.287-fold in the perfect and imperfect allocation scenarios. We further provide evidence on the effects of administrative division adjustments and local allocation. This suggests that city-level adjustments can yield more aggregate gain and that the output gain from nationwide allocation is likely to be more substantial than that from local allocation. Policy implications are proposed to improve the resource allocation efficiency in China.