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 capital misallocation emerges as a key endogenous state variable. Misallocation is endogenously driven by transitory aggregate liquidity shocks, as firms with different productivity levels respond differently to the same shock by optimally adjusting capacity utilization. Financial frictions and persistent idiosyncratic productivity make capital reallocation gradual, leading to slow-moving misallocation that drives time-series variation in low-frequency economic growth and serves as a source of systematic risk in asset markets. This mechanism operates through a feedback loop induced by the valuation channel: persistent misallocation elevates risk premia, which depresses the marginal q of intangible capital and reduces R&D incentives. The resulting decline in expected long-run growth and rise in macroeconomic volatility further amplifies risk premia under recursive preferences. We provide empirical evidence that capital misallocation captures low-frequency growth fluctuations and present supporting tests that confirm the model’s key predictions.
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
Note: AP EFG IO PR
References: Add references at CitEc
Citations: View citations in EconPapers (1)
Downloads: (external link)
http://www.nber.org/papers/w32147.pdf (application/pdf)
Access to the full text is generally limited to series subscribers, however if the top level domain of the client browser is in a developing country or transition economy free access is provided. More information about subscriptions and free access is available at http://www.nber.org/wwphelp.html. Free access is also available to older working papers.
Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:32147
Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w32147
The price is Paper copy available by mail.
Access Statistics for this paper
More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().