 Quantifying the allocative efficiency of capital: The role of capital utilizationPoorya Kabir, Eugene Tan and Ia Vardishvili Journal of Monetary Economics, 2025, vol. 155, issue C Abstract: Higher dispersion of log average revenue product of capital (ARPK) is commonly associated with lower capital allocative efficiency. We show this is a result of the assumption that capital utilization is fixed. However, when capital utilization is endogenous, higher capital allocative efficiency is associated with lower dispersion of log average revenue product of capital services (log difference between revenue and utilized capital), not ARPK. Furthermore, contrary to the standard relationship, increases to capital allocative efficiency is associated with higher ARPK dispersion when such improvements arise from greater utilization flexibility. We provide evidence supporting the mechanism and demonstrate counterfactuals where allocative efficiency gains are accompanied by higher ARPK dispersion. Lastly, we apply our framework to study the impact of a capital market liberalization reform in India. We estimate the reform improved allocative efficiency by 0.04%, but counterfactual analysis neglecting the response of utilization would have concluded efficiency gains of 5.25%. Keywords: Productivity; Capital utilization; Maintenance; Investment (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:155:y:2025:i:c:s0304393225000935 DOI: 10.1016/j.jmoneco.2025.103822 Access Statistics for this article Journal of Monetary Economics is currently edited by R. G. King and C. I. Plosser More articles in Journal of Monetary Economics from Elsevier |
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