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Expropriation Risk and Aggregate Productivity with Heterogeneous Firms

  • Virginia Olivella

    (Banque de France)

In this paper, I propose a general equilibrium model featuring heterogeneous firms and a government that is both unable to commit and relatively more impatient than firms. I find that, as predicted by theoretical papers on limited commitment, the threat of expropriation alone is enough to distort capital accumulation. Moreover, I show that the fact that the government is more impatient than firms induces additional growth dynamics by determining that distortions to capital do not completely go away once the long run stationary equilibrium has been reached. This is because the relative impatience of the government leads not only to decreases in promised utility by the firm when constraints do not bind, but also makes it very costly for a firm to increase its promised utility and capital when a constraint binds. Thus, promised utility will not increase as much as in the case where government and firms discount at the same rate, resulting in a stationary equilibrium level of capital that is less than optimal. Finally, when embedding the contracting problem between a firm and the government in a GE model with heterogeneous firms, I find that expropriation risk is capable of endogenously generating misallocation of resources across firms, with more productive firms being affected the most by the contracting frictions, thus leading to losses in aggregate output and total factor productivity in the long run stationary equilibrium.

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Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 985.

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Date of creation: 2012
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Handle: RePEc:red:sed012:985
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  1. Chang, Tai Hsieh & Peter, J- Klenow, 2007. "Misallocation and manufacturing TFP in China and India," MPRA Paper 35084, University Library of Munich, Germany, revised 15 Jun 2007.
  2. Rui Albuquerque & Hugo A. Hopenhayn, 2004. "Optimal Lending Contracts and Firm Dynamics," Review of Economic Studies, Oxford University Press, vol. 71(2), pages 285-315.
  3. Thomas, J. & Worral, T., 1991. "Foreign Direcyt Investment and the Risk of Expropriation," Papers 9126, Tilburg - Center for Economic Research.
  4. Rui Albuquerque, 2004. "The Composition of International Capital Flows: Risk Sharing Through Foreign Direct Investment," International Finance 0405004, EconWPA.
  5. Mark Aguiar & Manuel Amador, 2010. "Growth in the Shadow of Expropriation," 2010 Meeting Papers 1194, Society for Economic Dynamics.
  6. Francisco J. Buera & Yongseok Shin, 2013. "Financial Frictions and the Persistence of History: A Quantitative Exploration," Journal of Political Economy, University of Chicago Press, vol. 121(2), pages 221 - 272.
  7. repec:aei:rpaper:25796 is not listed on IDEAS
  8. Tauchen, George & Hussey, Robert, 1991. "Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models," Econometrica, Econometric Society, vol. 59(2), pages 371-96, March.
  9. Rui Albuquerque & Hugo A. Hopenhayn, 2004. "Optimal Lending Contracts and Firm Dynamics," Review of Economic Studies, Wiley Blackwell, vol. 71(2), pages 285-315, 04.
  10. Spear, Stephen E & Srivastava, Sanjay, 1987. "On Repeated Moral Hazard with Discounting," Review of Economic Studies, Wiley Blackwell, vol. 54(4), pages 599-617, October.
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