Misallocation and Asset Prices

Winston Dou, Yan Ji, Di Tian and Pengfei Wang

No 32147, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop an endogenous growth model with heterogeneous firms facing financial frictions, where misallocation emerges explicitly as a crucial endogenous state variable and significantly affects economic growth through the valuation channel. The model illustrates that transient macroeconomic shocks affecting misallocation can yield persistent effects on aggregate growth. In equilibrium, slow-moving misallocation endogenously generates long-run uncertainty about economic growth by distorting innovation decisions. When agents hold recursive preferences, misallocation-driven low-frequency growth fluctuations result in substantial risk premia in capital markets and large losses in welfare. We provide evidence that misallocation effectively captures low-frequency fluctuations in both aggregate growth and asset returns.

JEL-codes: L11 O30 O40 (search for similar items in EconPapers)
Date: 2024-02
New Economics Papers: this item is included in nep-dge, nep-fdg and nep-gro
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