IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/32147.html
   My bibliography  Save this paper

Misallocation and Asset Prices

Author

Listed:
  • Winston Wei Dou
  • Yan Ji
  • Di Tian
  • Pengfei Wang

Abstract

We develop an endogenous growth model with heterogeneous firms facing financial frictions, where capital misallocation emerges as a key endogenous state variable. Misallocation is endogenously driven by transitory aggregate liquidity shocks, as firms with different productivity levels respond differently to the same shock by optimally adjusting capacity utilization. Financial frictions and persistent idiosyncratic productivity make capital reallocation gradual, leading to slow-moving misallocation that drives time-series variation in low-frequency economic growth and serves as a source of systematic risk in asset markets. This mechanism operates through a feedback loop induced by the valuation channel: persistent misallocation elevates risk premia, which depresses the marginal q of intangible capital and reduces R&D incentives. The resulting decline in expected long-run growth and rise in macroeconomic volatility further amplifies risk premia under recursive preferences. We provide empirical evidence that capital misallocation captures low-frequency growth fluctuations and present supporting tests that confirm the model’s key predictions.

Suggested Citation

  • Winston Wei Dou & Yan Ji & Di Tian & Pengfei Wang, 2024. "Misallocation and Asset Prices," NBER Working Papers 32147, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:32147
    Note: AP EFG IO PR
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w32147.pdf
    Download Restriction: Access to the full text is generally limited to series subscribers, however if the top level domain of the client browser is in a developing country or transition economy free access is provided. More information about subscriptions and free access is available at http://www.nber.org/wwphelp.html. Free access is also available to older working papers.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

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


    Cited by:

    1. Filep-Mosberger, Palma & Kaszab, Lorant, 2024. "The endogenous growth and asset prices nexus revisited with closed-form solution," Finance Research Letters, Elsevier, vol. 68(C).

    More about this item

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

    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:nbr:nberwo:32147. See general information about how to correct material in RePEc.

    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.

    We have no bibliographic references for this item. You can help adding them by using 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.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.