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Capital Misallocation and Aggregate Factor Productivity

  • Costas Azariadis

    ()

    (Department of Economics, Washington University, St. Louis MO, USA; The Rimini Centre for Economic Analysis (RCEA), Rimini, Italy)

  • Leo Kaas

    ()

    (Department of Economics, University of Konstanz, Konstanz, Germany)

We propose a sectoral–shift theory of aggregate factor productivity for a class of economies with AK technologies, limited loan enforcement, and a constant production possibilities frontier. Both the growth rate and TFP respond to random and persistent endogenous fluctuations in the sectoral distribution of physical capital which, in turn, responds to 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. We also find highly volatile limit cycles in economies with small amounts of collateral.

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Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 39_10.

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Date of creation: Jan 2010
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Handle: RePEc:rim:rimwps:39_10
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  6. Chang-Tai Hsieh & Peter J. Klenow, 2007. "Misallocation and Manufacturing TFP in China and India," Discussion Papers 07-006, Stanford Institute for Economic Policy Research.
  7. Costas Azariadis & Leo Kaas, 2012. "Capital misallocation and aggregate factor productivity," Working Papers 2012-046, Federal Reserve Bank of St. Louis.
  8. Francis X. Diebold & Kamil Yılmaz, 2007. "Macroeconomic Volatility and Stock Market Volatility,World-Wide," Koç University-TUSIAD Economic Research Forum Working Papers 0711, Koc University-TUSIAD Economic Research Forum.
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  18. Benjamin Moll, 2009. "Creditor Rights, Inequality and Development in a Neoclassical Growth Model," 2009 Meeting Papers 1168, Society for Economic Dynamics.
  19. Azariadis, Costas & Kaas, Leo, 2007. "Asset price fluctuations without aggregate shocks," Journal of Economic Theory, Elsevier, vol. 136(1), pages 126-143, September.
  20. Eisfeldt, Andrea L. & Rampini, Adriano A., 2006. "Capital reallocation and liquidity," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 369-399, April.
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