Good finance, bad finance, and resource misallocation: Evidence from China

Jiapin Deng and Qiao Liu

Journal of Banking & Finance, 2024, vol. 159, issue C

Abstract: Using city-level data from China, we find that the overall size of finance does not affect the extent of resource misallocation. However, when finance is decomposed into different parts, we find that local government-driven finance backed by the revenues from land sales exacerbates the misallocation problem, while the remaining part of finance, which is more likely market-driven, significantly improves allocative efficiency. We use the instrumental variable approach to establish causality. Further evidence shows that local government-driven finance lowers allocative efficiency by facilitating the allocation of resources to the low-productivity state sector, but non-local government-driven finance reduces the extent of such distortions. Our analyses suggest that identifying the sources of financial assets and, more broadly, distinguishing between good finance and bad finance are critical to develop a socially desirable financial system.

Keywords: Finance; Resource misallocation; Local government; Land sales; State sector (search for similar items in EconPapers)
JEL-codes: G18 G20 H60 O16 O47 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:159:y:2024:i:c:s037842662300273x

DOI: 10.1016/j.jbankfin.2023.107078

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