The Cost of Capital and Misallocation in the United States

Miguel Faria-e-Castro, Julian Kozlowski and Jeremy Majerovitz

No 2025-013, Working Papers from Federal Reserve Bank of St. Louis

Abstract: We propose a framework to estimate capital misallocation using credit registry data and apply it to the United States. A dynamic corporate finance model maps loan-level observables into three rates: the lender’s discount rate, the firm’s private cost of capital, and the social cost of capital. We derive a sufficient statistic for misallocation that depends only on the mean and dispersion of the social cost of capital. Applying the framework to U.S. loan originations, we find substantial heterogeneity in the cost of capital but modest aggregate losses in normal times: reallocating capital across firms would raise output by about 0.7%. These losses more than doubled during 2020-2021, rising to 1.6%. The increase was driven primarily by greater dispersion in lender discount rates, reflecting both weaker pass-through from expected losses to loan interest rates and a rise in the cross-sectional variance of expected losses.

Keywords: cost of capital; misallocation; credit registry data (search for similar items in EconPapers)
JEL-codes: D24 E22 E44 O47 O51 (search for similar items in EconPapers)
Pages: 63 pages
Date: 2025-06-10, Revised 2026-07-14
New Economics Papers: this item is included in nep-eff and nep-fdg
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DOI: 10.20955/wp.2025.013

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