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A Structural Estimation on Capital Market Distortions in Chinese Manufacturing

  • Zheng (Michael) Song

    (University of Chicago, Booth School of Business)

  • Guiying (Laura) Wu

    (Division of Economics, School of Humanities and Social Sciences, Nanyang Technological University, Singapore, 637332)

Capital market distortions lower aggregate productive efficiency by misallocating re- sources. The existing literature infers such distortions from the dispersion of the average revenue product of capital. However, the methodology is subject to a set of identification issues: unobserved heterogeneities in production technology and market power; capital ad- justment costs with idiosyncratic shocks; and measurement errors in the data. This paper develops a structural econometric approach of estimating capital market distortions in en- vironments where all the above factors can be present. Using representative firm-level data from Chinese manufacturing from 2004 to 2007, we find that capital market distortions imply aggregate revenue losses of 40 percent. We also estimate distortions for U.S. manu- facturing firms in Compustat. Improving capital allocation e¢ ciency to the level observed among the Compustat firms would increase China's manufacturing revenue by 31 percent. Finally, we propose a simplified approach, which addresses the identification issues in a much more tractable way.

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File URL: http://www3.ntu.edu.sg/hss2/egc/wp/2013/2013-06.pdf
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Paper provided by Nanyang Technological University, School of Humanities and Social Sciences, Economic Growth Centre in its series Economic Growth Centre Working Paper Series with number 1306.

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Length: 55 pages
Date of creation: Jun 2013
Date of revision:
Handle: RePEc:nan:wpaper:1306
Contact details of provider: Postal: Nanyang Drive, Singapore 637332
Fax: 6795 5797
Web page: http://egc.hss.ntu.edu.sg/

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