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The Sources of Capital Misallocation

Listed author(s):
  • Joel M. David
  • Venky Venkateswaran

We develop and implement a methodology to disentangle various sources of capital misallocation, i.e., dispersion in static marginal products. Our strategy uses readily observable moments in firm-level data, e.g., capital and revenues, to measure the contributions of technological and informational frictions as well as a rich class of (potentially distortionary) firm-specific factors. Applying this method to manufacturing firms in China reveals a modest role for adjustment costs and uncertainty. A substantial fraction of the observed misallocation comes from other idiosyncratic factors, both productivity/size-dependent as well as permanent. Adjustment costs are relatively more salient for large US firms, though permanent firm-specific factors remain important. We bound the effects of unobserved heterogeneity in technologies/markups – our results suggest they account for a limited fraction of observed misallocation in China, but a potentially large share for US firms.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 23129.

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Date of creation: Feb 2017
Handle: RePEc:nbr:nberwo:23129
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  1. Eslava, Marcela & Haltiwanger, John & Kugler, Adriana & Kugler, Maurice, 2004. "The effects of structural reforms on productivity and profitability enhancing reallocation: evidence from Colombia," Journal of Development Economics, Elsevier, vol. 75(2), pages 333-371, December.
  2. Joel M. David & Hugo A. Hopenhayn & Venky Venkateswaran, 2016. "Information, Misallocation, and Aggregate Productivity," The Quarterly Journal of Economics, Oxford University Press, vol. 131(2), pages 943-1005.
  3. Tybout, James R. & Westbrook, M. Daniel, 1995. "Trade liberalization and the dimensions of efficiency change in Mexican manufacturing industries," Journal of International Economics, Elsevier, vol. 39(1-2), pages 53-78, August.
  4. Eslava, Marcela & Haltiwanger, John & Kugler, Adriana & Kugler, Maurice, 2004. "The effects of structural reforms on productivity and profitabality enhancing reallocation: evidence from Colombia," Discussion Paper Series In Economics And Econometrics 0408, Economics Division, School of Social Sciences, University of Southampton.
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