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Capital Misallocation: Frictions or Distortions?

Author

Listed:
  • Venky Venkateswaran

    (New York University)

  • Joel David

    (USC)

Abstract

We study a model of investment in which both technological and informational frictions as well as institutional/policy distortions lead to capital misallocation, i.e., static marginal products are not equalized. We devise an empirical strategy to disentangle these forces using readily observable moments in firm-level data. Applying this methodology to manufacturing firms in China reveals that adjustment costs and uncertainty have significant aggregate consequences but account for only a modest share of the observed dispersion in the marginal product of capital. A substantial fraction of misallocation stems from firmspecific distortions, both productivity/size-dependent as well as permanent. For large US firms, adjustment costs are relatively more salient, though permanent firm-level factors remain important. These results are robust to the presence of liquidity/financial constraints.

Suggested Citation

  • Venky Venkateswaran & Joel David, 2017. "Capital Misallocation: Frictions or Distortions?," 2017 Meeting Papers 1636, Society for Economic Dynamics.
  • Handle: RePEc:red:sed017:1636
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    References listed on IDEAS

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    1. Gita Gopinath & Şebnem Kalemli-Özcan & Loukas Karabarbounis & Carolina Villegas-Sanchez, 2017. "Capital Allocation and Productivity in South Europe," The Quarterly Journal of Economics, Oxford University Press, vol. 132(4), pages 1915-1967.
    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. 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.
    4. Brandt, Loren & Van Biesebroeck, Johannes & Zhang, Yifan, 2014. "Challenges of working with the Chinese NBS firm-level data," China Economic Review, Elsevier, vol. 30(C), pages 339-352.
    5. Eric Bartelsman & John Haltiwanger & Stefano Scarpetta, 2013. "Cross-Country Differences in Productivity: The Role of Allocation and Selection," American Economic Review, American Economic Association, vol. 103(1), pages 305-334, February.
    6. Buera,Francisco J. & Fattal Jaef,Roberto N., 2018. "The dynamics of development : innovation and reallocation," Policy Research Working Paper Series 8505, The World Bank.
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    Citations

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    Cited by:

    1. Diego Restuccia & Richard Rogerson, 2017. "The Causes and Costs of Misallocation," Journal of Economic Perspectives, American Economic Association, vol. 31(3), pages 151-174, Summer.
    2. Wright, Randall & Xiao, Sylvia Xiaolin & Zhu, Yu, 2018. "Frictional capital reallocation I: Ex ante heterogeneity," Journal of Economic Dynamics and Control, Elsevier, vol. 89(C), pages 100-116.
    3. Randall Wright & Sylvia Xiaolin Xiao & Yu Zhu, 2019. "Frictional Capital Reallocation I: Ex Ante Heterogeneity," Staff Working Papers 19-4, Bank of Canada.
    4. Kaymak, Barış & Schott, Immo, 2019. "Loss-offset provisions in the corporate tax code and misallocation of capital," Journal of Monetary Economics, Elsevier, vol. 105(C), pages 1-20.
    5. Jose Maria Barrero, 2017. "Firm Dynamics with Subjective Beliefs," 2017 Meeting Papers 367, Society for Economic Dynamics.
    6. Matthias Kehrig & Nicolas Vincent, 2017. "Do Firms Mitigate or Magnify Capital Misallocation? Evidence from Planet-Level Data," CESifo Working Paper Series 6401, CESifo.
    7. Andrea L. Eisfeldt & Yu Shi, 2018. "Capital Reallocation," NBER Working Papers 25085, National Bureau of Economic Research, Inc.
    8. Randall Wright & Xiaolin Xiao & Yu Zhu, 2018. "Frictional Capital Reallocation II: Ex Post Heterogeneity," 2018 Meeting Papers 544, Society for Economic Dynamics.
    9. Joel David, 2018. "Misallocation or Risk-Adjusted Capital Allocation?," 2018 Meeting Papers 323, Society for Economic Dynamics.
    10. Randall Wright & Sylvia Xiao & Yu Zhu, 2020. "Frictional Capital Reallocation with Ex Post Heterogeneity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 37, pages 227-253, August.

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