Misallocation under the Shadow of Death

Daisuke Miyakawa, Koki Oikawa and Kozo Ueda

Discussion papers from Research Institute of Economy, Trade and Industry (RIETI)

Abstract: This study focuses on a slow exit process, known as a shadow of death, as a new factor of inefficient resource allocation in the macroeconomy. First, we develop an endogenous growth model that incorporates firms' R&D investment and distorted exit decisions. The model shows that the exit of firms in the market equilibrium is inefficiently slow from the social viewpoint even without distortions such as corporate subsidies, which further impede the exit process. Second, our empirical analysis using Japanese firm-level data confirms that exiting firms exhibit the shadow of death in a manner that is consistent with our model. Further, the degree of the shadow of death is related to our distortion measures such as corporate subsidies. Third, our simulation based on the calibrated model suggests that an increase in subsidies can help explain recent firm dynamics in Japan and worsen productivity growth and welfare, although the quantitative impacts of subsidies are limited.

Pages: 37 pages
Date: 2022-03
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Persistent link: https://EconPapers.repec.org/RePEc:eti:dpaper:22014

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