Capital Allocation in Developing Countries

Joel Michael David, Venky Venkateswaran, Ana Paula Cusolito and Tatiana Didier Brandao

No 9031, Policy Research Working Paper Series from The World Bank

Abstract: This paper investigates the sources of capital misallocation across a group of 11 developing and developed countries. The main findings are (i) technological frictions, namely, adjustment costs and uncertainty, account for only a modest share of observed misallocation, leaving ample scope for other factors; (ii) heterogeneity in firm-level technologies potentially explains between one-quarter and one-half; but (iii) dispersion in markups is much smaller; and (iv) after accounting for these factors, on average, at least 50 percent of misallocation within each of these countries remains unexplained, suggesting a large role for additional, potentially distortionary factors. These factors are largely attributable to a component that is correlated with firm size/productivity and one that is essentially permanent to the firm. The paper reports a broad set of moments describing firm-level investment dynamics and detailed parameter estimates on a country-by-country basis, with an eye toward future work in this area.

Keywords: Pulp&Paper Industry; Plastics&Rubber Industry; Construction Industry; Business Cycles and Stabilization Policies; Food&Beverage Industry; Common Carriers Industry; Textiles; Apparel&Leather Industry; General Manufacturing; Public Sector Administrative and Civil Service Reform; De Facto Governments; Democratic Government; Public Sector Administrative&Civil Service Reform; Administrative&Civil Service Reform; International Trade and Trade Rules; Economic Conditions and Volatility; Trade and Services (search for similar items in EconPapers)
Date: 2019-10-01
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Citations: View citations in EconPapers (2)

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