The Sources of Capital Misallocation

Joel M. David, Venky Venkateswaran

NBER Working Paper No. 23129
Issued in February 2017, Revised in October 2017
NBER Program(s):Economic Fluctuations and Growth, Productivity, Innovation, and Entrepreneurship

We develop and implement a methodology to disentangle various sources of capital misallocation, i.e., dispersion in static marginal products. Our strategy uses readily observable moments in firm-level data, e.g., capital and revenues, to measure the contributions of technological and informational frictions as well as a rich class of (potentially distortionary) firm-specific factors. Applying this method to manufacturing firms in China reveals a modest role for adjustment costs and uncertainty. A substantial fraction of the observed misallocation comes from other idiosyncratic factors, both productivity/size-dependent as well as permanent. Adjustment costs are relatively more salient for large US firms, though permanent firm-specific factors remain important. We bound the effects of unobserved heterogeneity in technologies/markups – our results suggest they account for a limited fraction of observed misallocation in China, but a potentially large share for US firms.

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Document Object Identifier (DOI): 10.3386/w23129

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