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Migration and Spatial Misallocation in China

We structurally estimate the firm-level frictions across prefectures in China and quantify their aggregate and distributional implications. Based on a general equilibrium model with input and output distortions and migration, we show that the firm-level frictions are less dispersed and less correlated with productivity in richer prefectures. Counterfactual exercises show that reducing the within-prefecture misallocation increases the aggregate welfare, discourages migration towards large cities, and narrows the spatial inequality. Moreover, internal migration alleviates the impacts of micro-frictions on aggregate welfare and worsens their impacts on spatial inequality.