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Finance and Misallocation: Evidence from Plant-Level Data

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  • Virgiliu Midrigan
  • Daniel Yi Xu

Abstract

We use producer-level data to evaluate the role of financial frictions in determining total factor productivity (TFP). We study a model of establishment dynamics in which financial frictions reduce TFP through two channels. First, finance frictions distort entry and technology adoption decisions. Second, finance frictions generate dispersion in the returns to capital across existing producers and thus productivity losses from misallocation. Parameterizations of our model consistent with the data imply fairly small losses from misallocation, but potentially sizable losses from inefficiently low levels of entry and technology adoption.

Suggested Citation

  • Virgiliu Midrigan & Daniel Yi Xu, 2014. "Finance and Misallocation: Evidence from Plant-Level Data," American Economic Review, American Economic Association, vol. 104(2), pages 422-458, February.
  • Handle: RePEc:aea:aecrev:v:104:y:2014:i:2:p:422-58
    Note: DOI: 10.1257/aer.104.2.422
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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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