| Abstract | This paper quantifies misallocation in China’s industrial sector using firm-level data from 1998 to 2007, and finds out that: misallocation of capital and labor across industries lowers aggregate TFP by 19% on average, much higher than that in advanced economies; capital misallocation contributes 10 times more than labor misallocation to the overall efficiency loss. Over time, misallocation in mining and manufacturing sectors alleviated significantly, while utilities sector did not. Regression analysis shows that industries tend to be overinvested with lower concentration ratio, entry-exit barriers, higher SOE and middle-western firm shares; industries with higher job reallocation rate are more likely to attract too much labor. |