Provincial Trade, Financial Friction and Misallocation in China

Ohyun Kwon, Belton Fleisher (), William McGuire () and Min Qiang (Kent) Zhao
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William McGuire: Department of Economics, Postal: University of Washington , Tacoma, WA

No 2020-1, School of Economics Working Paper Series from LeBow College of Business, Drexel University

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 Chinese provinces with high capital market distortion. To formally test our model hypotheses, we develop a measure of regional financial friction based on our model such that underlying financial friction can be inferred from differences-in-differences in the market shares of private and state sectors and their marginal rental rates of capital. Our regression results confirm that our measure of financial friction has robust power in explaining interprovincial capital and labor flows. Our structural analysis shows that improving financial frictions results in an aggregate 3.9% welfare gain in China that is rather heterogeneously distributed across provinces.

Keywords: financial friction; regional capital flows; Chinese economy (search for similar items in EconPapers)
JEL-codes: F21 F22 O15 P23 R13 (search for similar items in EconPapers)
Pages: 67 pages
Date: 2020-03-30
New Economics Papers: this item is included in nep-cna, nep-fdg and nep-tra
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Working Paper: Provincial Trade, Financial Friction and Misallocation in China (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:drxlwp:2020_001

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