A Structural Estimation on Capital Market Distortions in Chinese Manufacturing

(Michael) Song Zheng and Guiying Wu ()
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(Michael) Song Zheng: University of Chicago, Booth School of Business

No 1306, Economic Growth Centre Working Paper Series from Nanyang Technological University, School of Social Sciences, Economic Growth Centre

Abstract: Capital market distortions lower aggregate productive efficiency by misallocating re- sources. The existing literature infers such distortions from the dispersion of the average revenue product of capital. However, the methodology is subject to a set of identification issues: unobserved heterogeneities in production technology and market power; capital ad- justment costs with idiosyncratic shocks; and measurement errors in the data. This paper develops a structural econometric approach of estimating capital market distortions in en- vironments where all the above factors can be present. Using representative firm-level data from Chinese manufacturing from 2004 to 2007, we find that capital market distortions imply aggregate revenue losses of 40 percent. We also estimate distortions for U.S. manu- facturing firms in Compustat. Improving capital allocation e¢ ciency to the level observed among the Compustat firms would increase China's manufacturing revenue by 31 percent. Finally, we propose a simplified approach, which addresses the identification issues in a much more tractable way.

Keywords: capital market distortions; Chinese manufacturing; structural estimation; un-observed heterogeneities (search for similar items in EconPapers)
JEL-codes: C15 D92 E22 O16 O47 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2013-06
New Economics Papers: this item is included in nep-cna, nep-sea and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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