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Capital Misallocation and Financial Development: A Sector-Level Analysis

Daniela Marconi () and Christian Upper

No 1143, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: This study investigates how financial development affects capital allocation across industries in a panel of countries at different stages of development (China, India, Mexico, Korea, Japan and the US) over the period 1980-2014. Following the approach proposed by Chari et al (2007) and Aoki (2012), we compute wedges for capital and labour inputs for 26 industrial sectors in the six countries and add them up to economy-wide measures of capital and labour misallocation. We find that more developed financial systems allocate capital investment more efficiently than less developed ones. If financial development is low, faster capital accumulation is associated with a worsening of allocative efficiency. This effect reverses for higher levels of financial development. Sectors with high R&D expenditures or high capital investment benefit most from financial development. These effects are not only statistically significant, they are also large in economic terms.

Keywords: factor allocation; total factor productivity; financial development. (search for similar items in EconPapers)
JEL-codes: E22 E23 O16 O47 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eff, nep-fdg, nep-mac and nep-tid
Date: 2017-10
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Related works:
Working Paper: Capital misallocation and financial development: A sector-level analysis (2017) Downloads
Working Paper: CAPITAL MISALLOCATION AND FINANCIAL DEVELOPMENT: A SECTOR-LEVEL ANALYSIS (2017) Downloads
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