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Capital misallocation and aggregate factor productivity

Listed author(s):
  • Azariadis, Costas
  • Kaas, Leo

We propose a sectoral-shift theory of aggregate factor productivity for a class of economies with AK technologies, limited loan enforcement, a constant production possibilities frontier, and finitely many sectors producing the same good. Both the growth rate and total factor productivity in these economies respond to random and persistent endogenous fluctuations in the sectoral distribution of physical capital which, in turn, responds to persistent and reversible exogenous shifts in relative sector productivities. Surplus capital from less productive sectors is lent to more productive ones in the form of secured collateral loans, as in Kiyotaki-Moore (1997), and also as unsecured reputational loans suggested in Bulow-Rogoff (1989). Endogenous debt limits slow down capital reallocation, preventing the equalization of risk-adjusted equity yields across sectors. Economy-wide factor productivity and the aggregate growth rate are both negatively correlated with the dispersion of sectoral rates of return, sectoral TFP and sectoral growth rates. If sector productivities follow a symmetric two-state Markov process, many of our economies converge to a limit cycle alternating between mild expansions and abrupt contractions. We also find highly periodic and volatile limit cycles in economies with small amounts of collateral.

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File URL: https://mpra.ub.uni-muenchen.de/15742/1/MPRA_paper_15742.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 15742.

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Date of creation: 15 Jun 2009
Handle: RePEc:pra:mprapa:15742
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  2. Loungani, Prakash & Rush, Mark & Tave, William, 1990. "Stock market dispersion and unemployment," Journal of Monetary Economics, Elsevier, vol. 25(3), pages 367-388, June.
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  12. Costas Azariadis & Leo Kaas, 2009. "Capital misallocation and aggregate factor productivity," Working Papers 2009-028, Federal Reserve Bank of St. Louis.
  13. Francisco J. Buera & Joseph P. Kaboski & Yongseok Shin, 2011. "Finance and Development: A Tale of Two Sectors," American Economic Review, American Economic Association, vol. 101(5), pages 1964-2002, August.
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  18. Edward C. Prescott & Stephen L. Parente, 1999. "Monopoly Rights: A Barrier to Riches," American Economic Review, American Economic Association, vol. 89(5), pages 1216-1233, December.
  19. Azariadis, Costas & Kaas, Leo, 2007. "Asset price fluctuations without aggregate shocks," Journal of Economic Theory, Elsevier, vol. 136(1), pages 126-143, September.
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  23. Kiminori Matsuyama, 2007. "Credit Traps and Credit Cycles," American Economic Review, American Economic Association, vol. 97(1), pages 503-516, March.
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