Market distortions impact efficiency and welfare gains in firm selection.
Disparities in revenue productivity in different industries can be caused by firms' optimal decisions under technology and information constraints, not just factor misallocation. Market distortions like firms' market power can lead to inefficient factor accumulation, affecting revenue productivity and allocative efficiency. By studying these interactions, researchers found that implementing optimal policies can lead to welfare gains proportional to the change in average revenue product and the number of operating units in the market.