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Capital misallocation and credit constraints: Theory and evidence from natural

Listed author(s):
  • Yanos Zylberberg

    (PSE - Paris-Jourdan Sciences Economiques - CNRS - Centre National de la Recherche Scientifique - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENS Paris - École normale supérieure - Paris - École des Ponts ParisTech (ENPC), PSE - Paris School of Economics)

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    This article builds a model of financial frictions to explain the aftermath of natural disasters. In constrained economies, after a large shock on capital, affected entrepreneurs might lose access to credit together with their stock of capital. Investment does not flow to high-returns projects. Accordingly, in constrained economies, a shock on capital is associated with an initial decrease of domestic credit and an investment slack. I find direct support for the theoretical model using objective measures on sudden natural disasters between 1980 and 2006. Constrained economies experience an initial decline in their level of investment, which reflects on the immediate GDP growth. This effect fades away after 3 years. In frictionless environment, the increase of credit offsets almost perfectly the estimated capital losses. The underlying credit frictions computed using a structural equation prove to be correlated to more classic measures of financial development.

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    File URL: https://halshs.archives-ouvertes.fr/halshs-00607212/document
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    Paper provided by HAL in its series PSE Working Papers with number halshs-00607212.

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    Date of creation: Jul 2011
    Handle: RePEc:hal:psewpa:halshs-00607212
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00607212
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