Provincial Trade, Financial Friction and Misallocation in China

Ohyun Kwon, Belton Fleisher (), William H. McGuire () and Min Qiang (Kent) Zhao
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William H. McGuire: University of Washington Tacoma

No 13074, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: We study the implications of financial-market imperfections on labor and capital misallocation in China. Financial friction stems from private sectors' credit constraints that limit the efficient use of capital relative to state firms. Our model can jointly explain labor flows out of and capital flows into the Chinese provinces with high capital market distortion. To formally test this hypothesis, we propose a measure of regional financial friction based on our model. We show that the underlying financial friction can be inferred by differences-in-differences in the market shares of private and state sectors and their marginal rental rates of capital. Our regression results show that our measure of financial friction has robust explanatory power regarding interprovincial capital and labor flows. Our structural analysis shows that improving financial friction in China can lead to 3.9% welfare gain in China.

Keywords: financial friction; regional capital flows; Chinese economy (search for similar items in EconPapers)
JEL-codes: E5 F4 H3 O5 R12 (search for similar items in EconPapers)
Pages: 63 pages
Date: 2020-03
New Economics Papers: this item is included in nep-cna, nep-fdg, nep-mac and nep-tra
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Working Paper: Provincial Trade, Financial Friction and Misallocation in China (2020)
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