NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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):EFG, PR

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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