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Provincial Trade, Financial Friction and Misallocation in China

Author

Listed:
  • Kwon, Ohyun

    (Drexel University)

  • Fleisher, Belton M.

    (Ohio State University)

  • McGuire, William H.

    (University of Washington Tacoma)

  • Zhao, Min Qiang

    (Xiamen University)

Abstract

We study the implications of financial-market imperfections on labor and capital misallocation in China. Financial friction stems from private sectors' credit constraints that limit the efficient use of capital relative to state firms. Our model can jointly explain labor flows out of and capital flows into the Chinese provinces with high capital market distortion. To formally test this hypothesis, we propose a measure of regional financial friction based on our model. We show that the underlying financial friction can be inferred by differences-in-differences in the market shares of private and state sectors and their marginal rental rates of capital. Our regression results show that our measure of financial friction has robust explanatory power regarding interprovincial capital and labor flows. Our structural analysis shows that improving financial friction in China can lead to 3.9% welfare gain in China.

Suggested Citation

  • Kwon, Ohyun & Fleisher, Belton M. & McGuire, William H. & Zhao, Min Qiang, 2020. "Provincial Trade, Financial Friction and Misallocation in China," IZA Discussion Papers 13074, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp13074
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    More about this item

    Keywords

    financial friction; regional capital flows; Chinese economy;
    All these keywords.

    JEL classification:

    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • O5 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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