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Investment Frictions and the Aggregate Output Loss in China

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  • Guiying Laura Wu

Abstract

type="main" xml:id="obes12064-abs-0001"> Investment frictions reduce, delay or protract investment expenditure that is necessary for firms to capture growth opportunities. Using a capital adjustment costs framework, this article estimates the gap between China's actual and frictionless aggregate output. It applies the method of simulated moments to a fully structural investment model on a panel of Chinese firms and takes into account potential unobserved heterogeneities and measurement error in the data. The estimated capital adjustment costs imply that if Chinese firms had faced a lower level of adjustment costs such as in the US, China's aggregate output would be 25% higher.

Suggested Citation

  • Guiying Laura Wu, 2015. "Investment Frictions and the Aggregate Output Loss in China," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 77(3), pages 437-465, June.
    • Handle: RePEc:bla:obuest:v:77:y:2015:i:3:p:437-465
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    File URL: http://hdl.handle.net/10.1111/obes.2015.77.issue-3
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    Cited by:

    1. Xu, Xiangyun & Li, Xing & Meng, Jie & Hu, Xueqi & Ge, Yingfan, 2024. "The impact of the tail risk of demand on corporate investment: Evidence from Chinese manufacturing firms," Pacific-Basin Finance Journal, Elsevier, vol. 85(C).
    2. Ding, Sai & Jiang, Wei & Li, Shengyu & Wei, Shang-Jin, 2024. "Fiscal policy volatility and capital misallocation: Evidence from China," European Economic Review, Elsevier, vol. 167(C).
    3. Tang, Le, 2022. "The dynamic demand for capital and labor: Evidence from Chinese industrial firms," Economic Modelling, Elsevier, vol. 107(C).
    4. Tang, Le, 2023. "SOEs reform and capital efficiency in China: A structural analysis," International Review of Economics & Finance, Elsevier, vol. 85(C), pages 1-20.
    5. Tang, Le, 2021. "Investment dynamics and capital distortion: State and non-state firms in China," Journal of Asian Economics, Elsevier, vol. 73(C).
    6. Le Tang & Jun Zhang & Jim Huangnan Shen, 2024. "Capital misallocation in Chinese industrial firms," Scottish Journal of Political Economy, Scottish Economic Society, vol. 71(1), pages 75-100, February.

    More about this item

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General

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