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Do Firms Mitigate or Magnify Capital Misallocation? Evidence from Planet-Level Data

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  • Matthias Kehrig
  • Nicolas Vincent

Abstract

Almost two thirds of the cross-plant dispersion in marginal revenue products of capital occurs across plants within the same firm rather than between firms. Even though firms allocate invest- ment very differently across their plants, they do not equalize marginal revenue products across their plants. We reconcile these findings in a model of multi-plant firms, physical adjustment costs and credit constraints. Credit constrained multi-plant firms can utilize internal capital markets by concentrating internal funds on investment projects in only a few of their plants in a given period and rotating funds to another set of plants in the future. The resulting increase in within-firm dispersion of marginal revenue products of capital is hence not a symptom of misallocation within the firm, but rather actions taken by the firm to mitigate external credit constraints and adjustment costs of capital. Economies with multi-plant firms produce more aggregate output despite higher dispersion in marginal revenue products of capital compared to economies with single-plant firms. Because emerging economies are predominantly populated by single-plant firms, the gains from reducing their distortions to the level of developed are larger than previously thought.

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  • Matthias Kehrig & Nicolas Vincent, 2017. "Do Firms Mitigate or Magnify Capital Misallocation? Evidence from Planet-Level Data," CESifo Working Paper Series 6401, CESifo.
  • Handle: RePEc:ces:ceswps:_6401
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    Cited by:

    1. Joel M. David & Venky Venkateswaran, 2019. "The Sources of Capital Misallocation," American Economic Review, American Economic Association, vol. 109(7), pages 2531-2567, July.
    2. Drautzburg, Thorsten, 2019. "Entrepreneurial tail risk: Implications for employment dynamics," Journal of Monetary Economics, Elsevier, vol. 104(C), pages 85-100.
    3. Alam, M. Jahangir, 2020. "Capital misallocation: Cyclicality and sources," Journal of Economic Dynamics and Control, Elsevier, vol. 112(C).
    4. Guo, Audrey, 2020. "The Effects of Unemployment Insurance Taxation on Multi-Establishment Firms," MPRA Paper 97919, University Library of Munich, Germany.
    5. Robert Kurtzman & David Zeke, 2020. "Misallocation Costs of Digging Deeper into the Central Bank Toolkit," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 38, pages 94-126, October.
    6. Andrea L. Eisfeldt & Yu Shi, 2018. "Capital Reallocation," NBER Working Papers 25085, National Bureau of Economic Research, Inc.
    7. Dan Cao & Erick Sager & Henry Hyatt & Toshihiko Mukoyama, 2019. "Firm Growth through New Establishments," 2019 Meeting Papers 1484, Society for Economic Dynamics.
    8. David, Joel & Schmid, Lukas & Zeke, David, 2018. "Risk-Adjusted Capital Allocation and Misallocation," CEPR Discussion Papers 13205, C.E.P.R. Discussion Papers.
    9. Meier, Matthias, 2017. "Time to Build and the Business Cycle," VfS Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168059, Verein für Socialpolitik / German Economic Association.

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    More about this item

    Keywords

    misallocation; productivity dispersion; multi-plants firms; internal capital markets;
    All these keywords.

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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