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Misallocation with Lumpy Investment

Author

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  • Oskolkov, Aleksei
  • Lippi, Francesco

Abstract

This paper studies capital misallocation in a tractable model with random fixed costs of adjustment. We identify the distribution of fixed costs and productivity shocks using the entire size distribution and frequency of investments and provide an efficient estimation method. We derive the measure of capital misallocation in the presence of fixed costs and show that it differs from the traditional metric based on the variance of marginal product of capital. The key feature of models with lumpy investments responsible for this is their non-linearity: the distribution of marginal product of capital is not log-normal even with normal shocks and non-degenerate even when shocks are small. We apply our method to 40 years of panel data on Italian firms and find misallocation costs about 0.5 - 2% of output. Fixed costs contribute about one half to traditional measures of TFPR dispersion, putting an upper bound on potential inefficiencies.

Suggested Citation

  • Oskolkov, Aleksei & Lippi, Francesco, 2026. "Misallocation with Lumpy Investment," CEPR Discussion Papers 21212, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:21212
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    File URL: https://cepr.org/publications/DP21212
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    Keywords

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    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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