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Capital misallocation in China: Financial frictions or policy distortions?

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  • Wu, Guiying Laura

Abstract

Policy distortions and financial frictions are two leading candidates in generating capital misallocation. This paper designs an identification strategy to separate their effects on average MRPK dispersion across firm ownership, as the average treatment effect on the treated and the selection bias from a policy intervention. Financial frictions are estimated to cause an aggregate TFP loss of 8.3 percent on the intensive margin, which accounts for 30 percent of the capital misallocation observed in China. Using the counterfactual MRPK from a matching procedure, some popular hypotheses on what drive the policy distortions are tested in the matched samples.

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  • Wu, Guiying Laura, 2018. "Capital misallocation in China: Financial frictions or policy distortions?," Journal of Development Economics, Elsevier, vol. 130(C), pages 203-223.
  • Handle: RePEc:eee:deveco:v:130:y:2018:i:c:p:203-223
    DOI: 10.1016/j.jdeveco.2017.10.014
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    More about this item

    Keywords

    Capital misallocation; Financial frictions; Policy distortions; Propensity score matching; Chinese economy;
    All these keywords.

    JEL classification:

    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • P33 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - International Trade, Finance, Investment, Relations, and Aid

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