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Capital Misallocation and Aggregate Factor Productivity

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  • Costas Azariadis

    ()
    (Department of Economics, Washington University, St. Louis MO, USA; The Rimini Centre for Economic Analysis (RCEA), Rimini, Italy)

  • Leo Kaas

    ()
    (Department of Economics, University of Konstanz, Konstanz, Germany)

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Abstract

We propose a sectoral-shift theory of aggregate factor productivity for a class of economies with AK technologies, limited loan enforcement, a constant production possibilities frontier, and finitely many sectors producing the same good. Both the growth rate and total factor productivity in these economies respond to random and persistent endogenous fluctuations in the sectoral distribution of physical capital which, in turn, responds to persistent and reversible exogenous shifts in relative sector productivities. Surplus capital from less productive sectors is lent to more productive ones in the form of secured collateral loans, as in Kiyotaki-Moore (1997), and also as unsecured reputational loans suggested in Bulow-Rogoff (1989). Endogenous debt limits slow down capital reallocation, preventing the equalization of risk-adjusted equity yields across sectors. Economy-wide factor productivity and the aggregate growth rate are both negatively correlated with the dispersion of sectoral rates of return, sectoral TFP and sectoral growth rates. If sector productivities follow a symmetric two-state Markov process, many of our economies converge to a limit cycle alternating between mild expansions and abrupt contractions. We also find highly periodic and volatile limit cycles in economies with small amounts of collateral.

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Bibliographic Info

Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 39_10.

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Date of creation: Jan 2010
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Handle: RePEc:rim:rimwps:39_10

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Keywords: TFP; misallocation; sectoral shocks; collateral; reputation;

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  1. Stephen L. Parente & Edward C. Prescott, 2002. "Barriers to Riches," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262661306, December.
  2. Benjamin Moll, 2009. "Creditor Rights, Inequality and Development in a Neoclassical Growth Model," 2009 Meeting Papers 1168, Society for Economic Dynamics.
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  5. Azariadis, Costas & Kaas, Leo, 2009. "Capital misallocation and aggregate factor productivity," MPRA Paper 15742, University Library of Munich, Germany.
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  9. Azariadis, Costas & Kaas, Leo, 2007. "Asset price fluctuations without aggregate shocks," Journal of Economic Theory, Elsevier, vol. 136(1), pages 126-143, September.
  10. Brainard, S Lael & Cutler, David M, 1993. "Sectoral Shifts and Cyclical Unemployment Reconsidered," The Quarterly Journal of Economics, MIT Press, vol. 108(1), pages 219-43, February.
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  17. Kiminori Matsuyama, 2007. "Credit Traps and Credit Cycles," American Economic Review, American Economic Association, vol. 97(1), pages 503-516, March.
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  23. Robert E. Hall & Charles I. Jones, 1999. "Why Do Some Countries Produce So Much More Output Per Worker Than Others?," The Quarterly Journal of Economics, MIT Press, vol. 114(1), pages 83-116, February.
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Citations

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Cited by:
  1. Costas Azariadis & Leo Kaas, 2012. "Self-fulfilling credit cycles," Working Papers 2012-047, Federal Reserve Bank of St. Louis.
  2. Azariadis, Costas & Kaas, Leo, 2009. "Capital misallocation and aggregate factor productivity," MPRA Paper 15742, University Library of Munich, Germany.
  3. Petra Marotzke, 2011. "Macroeconomic Stability and Wage Inequality: A Model with Credit and Labor Market Frictions," Working Paper Series of the Department of Economics, University of Konstanz 2011-38, Department of Economics, University of Konstanz.

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