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Capital misallocation: Cyclicality and sources

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  • Alam, M. Jahangir

Abstract

Capital misallocation can lower aggregate total factor productivity, but much less is known about its cyclicality. Using European firm-level data for 2005 to 2014, I establish that capital misallocation, as measured by the dispersion of returns to capital, is higher during recessions and lower during booms. This result is robust to using a much longer dataset from Compustat for the United States and Canada. I also find that firms’ net worth, measured as the difference between total assets and liabilities, relative to sales, can explain more capital misallocation than all the other examined firm-level factors combined. Furthermore, my results suggest that firms’ net worth explains approximately 10 percent of capital misallocation and 30 percent of its cyclicality.

Suggested Citation

  • Alam, M. Jahangir, 2020. "Capital misallocation: Cyclicality and sources," Journal of Economic Dynamics and Control, Elsevier, vol. 112(C).
    • Handle: RePEc:eee:dyncon:v:112:y:2020:i:c:s0165188920300014
    DOI: 10.1016/j.jedc.2020.103831
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    3. Yanwei Lyu & Yahui Ge & Jinning Zhang, 2023. "The impact of digital economy on capital misallocation: evidence from China," Economic Change and Restructuring, Springer, vol. 56(5), pages 3475-3499, October.

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    More about this item

    Keywords

    Misallocation; Decomposition; Countercyclical; Net worth; Productivity;
    All these keywords.

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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