The left panel shows the equilibrium relative size \(q(z)\) and the planner’s relative size \(q^*(z)\) as functions of productivity for our benchmark economy with \(\mathcal{M}=1.15\). The right panel shows the equilibrium employment \(l(z)\) and the planner’s employment \(l^*(z)\) for the same economy. More productive firms have higher markups and produce too little and employ too little compared to the planner’s allocation. Less productive firms produce too much and employ too much compared to the planner’s allocation. In this figure aggregate employment in the decentralized equilibrium is the same as aggregate employment for the planner. Our measure of misallocation is the aggregate output loss implied by the equilibrium allocation relative to the planner’s allocation.