Risk-Adjusted Capital Allocation and Misallocation
Lukas Schmid and
No WP-2020-34, Working Paper Series from Federal Reserve Bank of Chicago
We develop a theory linking “misallocation,” i.e., dispersion in marginal products of capital (MPK), to macroeconomic risk. Dispersion in MPK depends on (i) heterogeneity in firm-level risk premia and (ii) the price of risk, and thus is countercyclical. We document strong empirical support for these predictions. Stock market-based measures of risk premia imply that risk considerations explain about 30% of observed MPK dispersion among US firms and rationalize a large persistent component in firm-level MPK. Risk-based MPK dispersion, although not prima facie inefficient, lowers long-run aggregate productivity by as much as 6%, suggesting large “productivity costs” of business cycles.
Keywords: misallocation; productivity; costs of business cycles; risk premia (search for similar items in EconPapers)
JEL-codes: D24 D25 E22 E32 G12 O47 (search for similar items in EconPapers)
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Journal Article: Risk-adjusted capital allocation and misallocation (2022)
Working Paper: Risk-Adjusted Capital Allocation and Misallocation (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedhwp:92319
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