IDEAS home Printed from https://ideas.repec.org/p/nan/wpaper/1306.html
   My bibliography  Save this paper

A Structural Estimation on Capital Market Distortions in Chinese Manufacturing

Author

Listed:
  • 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)

Abstract

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.

Suggested Citation

  • Zheng (Michael) Song & Guiying (Laura) Wu, 2013. "A Structural Estimation on Capital Market Distortions in Chinese Manufacturing," Economic Growth Centre Working Paper Series 1306, Nanyang Technological University, School of Social Sciences, Economic Growth Centre.
  • Handle: RePEc:nan:wpaper:1306
    as

    Download full text from publisher

    File URL: http://www3.ntu.edu.sg/hss2/egc/wp/2013/2013-06.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Angeletos, George-Marios & Panousi, Vasia, 2011. "Financial integration, entrepreneurial risk and global dynamics," Journal of Economic Theory, Elsevier, pages 863-896.
    2. Francisco J. Buera & Joseph P. Kaboski & Yongseok Shin, 2011. "Finance and Development: A Tale of Two Sectors," American Economic Review, American Economic Association, pages 1964-2002.
    3. Francesco Caselli & James Feyrer, 2007. "The Marginal Product of Capital," The Quarterly Journal of Economics, Oxford University Press, vol. 122(2), pages 535-568.
    4. Francesco Caselli & Nicola Gennaioli, 2013. "Dynastic Management," Economic Inquiry, Western Economic Association International, vol. 51(1), pages 971-996, January.
    5. Diego Restuccia & Richard Rogerson, 2008. "Policy Distortions and Aggregate Productivity with Heterogeneous Plants," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(4), pages 707-720, October.
    6. Cogley, Timothy & Matthes, Christian & Sbordone, Argia M., 2011. "Optimal disinflation under learning," Staff Reports 524, Federal Reserve Bank of New York, revised 01 May 2014.
    7. Loren Brandt & Trevor Tombe & Xiadong Zhu, 2013. "Factor Market Distortions Across Time, Space, and Sectors in China," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(1), pages 39-58, January.
    8. Nick Bloom & Stephen Bond & John Van Reenen, 2007. "Uncertainty and Investment Dynamics," Review of Economic Studies, Oxford University Press, vol. 74(2), pages 391-415.
    9. David Dollar & Shang-Jin Wei, 2007. "Das (Wasted) Kapital; Firm Ownership and Investment Efficiency in China," IMF Working Papers 07/9, International Monetary Fund.
    10. Diego Restuccia & Richard Rogerson, 2013. "Misallocation and productivity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(1), pages 1-10, January.
    11. S.K. Bhutani, 2009. "China and India," India Quarterly: A Journal of International Affairs, , vol. 65(4), pages 383-391, October.
    12. Janice Eberly & Sergio Rebelo & Nicolas Vincent, 2008. "Investment and Value: A Neoclassical Benchmark," Cahiers de recherche 08-03, HEC Montréal, Institut d'économie appliquée.
    13. Christopher A. Hennessy & Toni M. Whited, 2007. "How Costly Is External Financing? Evidence from a Structural Estimation," Journal of Finance, American Finance Association, vol. 62(4), pages 1705-1745, August.
    14. Mankiw, N Gregory & Shapiro, Matthew D, 1986. "Risk and Return: Consumption Beta versus Market Beta," The Review of Economics and Statistics, MIT Press, pages 452-459.
    15. Mankiw, N Gregory & Shapiro, Matthew D, 1986. "Risk and Return: Consumption Beta versus Market Beta," The Review of Economics and Statistics, MIT Press, pages 452-459.
    16. Eric Bartelsman & John Haltiwanger & Stefano Scarpetta, 2013. "Cross-Country Differences in Productivity: The Role of Allocation and Selection," American Economic Review, American Economic Association, pages 305-334.
    17. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, pages 141-206.
    18. George-Marios Angeletos & Vasia Panousi, 2011. "Financial Integration, Entrepreneurial Risk and Global Imbalances," NBER Working Papers 16761, National Bureau of Economic Research, Inc.
    19. Benjamin Moll, 2014. "Productivity Losses from Financial Frictions: Can Self-Financing Undo Capital Misallocation?," American Economic Review, American Economic Association, pages 3186-3221.
    20. Chang-Tai Hsieh & Peter J. Klenow, 2009. "Misallocation and Manufacturing TFP in China and India," The Quarterly Journal of Economics, Oxford University Press, pages 1403-1448.
    21. Eric Bartelsman & John Haltiwanger & Stefano Scarpetta, 2013. "Cross-Country Differences in Productivity: The Role of Allocation and Selection," American Economic Review, American Economic Association, pages 305-334.
    22. Francisco J. Buera & Joseph P. Kaboski & Yongseok Shin, 2011. "Finance and Development: A Tale of Two Sectors," American Economic Review, American Economic Association, pages 1964-2002.
    23. Richard Blundell & Stephen Bond, 1995. "Initial conditions and moment restrictions in dynamic panel data models," IFS Working Papers W95/17, Institute for Fiscal Studies.
    24. Brandt, Loren & Van Biesebroeck, Johannes & Zhang, Yifan, 2012. "Creative accounting or creative destruction? Firm-level productivity growth in Chinese manufacturing," Journal of Development Economics, Elsevier, pages 339-351.
    25. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, pages 115-143.
    26. Asker, John & Collard-Wexler, Allan & De Loecker, Jan, 2011. "Productivity volatility and the misallocation of resources in developing economies," CEPR Discussion Papers 8469, C.E.P.R. Discussion Papers.
    27. Russell Cooper & Joao Ejarque, 2003. "Financial Frictions and Investment: Requiem in Q," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 710-728, October.
    28. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, pages 141-206.
    29. Zhang, Junsen & Zhao, Yaohui & Park, Albert & Song, Xiaoqing, 2005. "Economic returns to schooling in urban China, 1988 to 2001," Journal of Comparative Economics, Elsevier, pages 730-752.
    30. Russell W. Cooper & John C. Haltiwanger, 2006. "On the Nature of Capital Adjustment Costs," Review of Economic Studies, Oxford University Press, vol. 73(3), pages 611-633.
    31. Zvi Eckstein & Kenneth I. Wolpin, 1999. "Why Youths Drop Out of High School: The Impact of Preferences, Opportunities, and Abilities," Econometrica, Econometric Society, vol. 67(6), pages 1295-1340, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Guiying (Laura) Wu, 2013. "Investment Frictions and the Aggregate Output Loss in China," Economic Growth Centre Working Paper Series 1307, Nanyang Technological University, School of Social Sciences, Economic Growth Centre.
    2. Guiying Laura Wu, 2015. "Investment Frictions and the Aggregate Output Loss in China," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 77(3), pages 437-465, June.
    3. Xiaodong Zhu, 2012. "Understanding China's Growth: Past, Present, and Future," Journal of Economic Perspectives, American Economic Association, pages 103-124.
    4. Daniel Dias & Carlos Robalo Marques & Christine Richmond, 2016. "A tale of two sectors: why is misallocation higher in services than in manufacturing?," Working Papers w201614, Banco de Portugal, Economics and Research Department.
    5. Daniel Dias & Carlos Robalo Marques & Christine Richmond, 2016. "A tale of two sectors: why is misallocation higher in services than in manufacturing?," Working Papers w201614, Banco de Portugal, Economics and Research Department.
    6. Beladi, Hamid & Chao, Chi-Chur & Ee, Mong Shan, 2016. "Capital Market Distortion, Firm Dynamics and Wage Inequality," RIEI Working Papers 2016-05, Xi'an Jiaotong-Liverpool University, Research Institute for Economic Integration.

    More about this item

    Keywords

    capital market distortions; Chinese manufacturing; structural estimation; un-observed heterogeneities;

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nan:wpaper:1306. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Magdalene Lim). General contact details of provider: http://edirc.repec.org/data/dentusg.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.