Capital Misallocation: Frictions or Distortions?

Venky Venkateswaran and Joel David

No 1636, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: We study a model of investment in which both technological and informational frictions as well as institutional/policy distortions lead to capital misallocation, i.e., static marginal products are not equalized. We devise an empirical strategy to disentangle these forces using readily observable moments in firm-level data. Applying this methodology to manufacturing firms in China reveals that adjustment costs and uncertainty have significant aggregate consequences but account for only a modest share of the observed dispersion in the marginal product of capital. A substantial fraction of misallocation stems from firmspecific distortions, both productivity/size-dependent as well as permanent. For large US firms, adjustment costs are relatively more salient, though permanent firm-level factors remain important. These results are robust to the presence of liquidity/financial constraints.

Date: 2017
New Economics Papers: this item is included in nep-bec, nep-dge, nep-eff and nep-tra
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed017:1636

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