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A Structural Estimation on Capital Market Distortions in Chinese Manufacturing

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Author Info

  • Zheng (Michael) Song

    (University of Chicago, Booth School of Business)

  • Guiying (Laura) Wu

    (Division of Economics, School of Humanities and Social Sciences, Nanyang Technological University, Singapore, 637332)

Abstract

Capital market distortions lower aggregate productive efficiency by misallocating re- sources. The existing literature infers such distortions from the dispersion of the average revenue product of capital. However, the methodology is subject to a set of identification issues: unobserved heterogeneities in production technology and market power; capital ad- justment costs with idiosyncratic shocks; and measurement errors in the data. This paper develops a structural econometric approach of estimating capital market distortions in en- vironments where all the above factors can be present. Using representative firm-level data from Chinese manufacturing from 2004 to 2007, we find that capital market distortions imply aggregate revenue losses of 40 percent. We also estimate distortions for U.S. manu- facturing firms in Compustat. Improving capital allocation e¢ ciency to the level observed among the Compustat firms would increase China's manufacturing revenue by 31 percent. Finally, we propose a simplified approach, which addresses the identification issues in a much more tractable way.

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Bibliographic Info

Paper provided by Nanyang Technolgical University, School of Humanities and Social Sciences, Economic Growth centre in its series Economic Growth centre Working Paper Series with number 1306.

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Length: 55 pages
Date of creation: Jun 2013
Date of revision:
Handle: RePEc:nan:wpaper:1306

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Keywords: capital market distortions; Chinese manufacturing; structural estimation; un-observed heterogeneities;

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Cited by:
  1. Guiying (Laura) Wu, 2013. "Investment Frictions and the Aggregate Output Loss in China," Economic Growth centre Working Paper Series 1307, Nanyang Technolgical University, School of Humanities and Social Sciences, Economic Growth centre.

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