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The Sources of Capital Misallocation

Joel M. David, Venky Venkateswaran

NBER Working Paper No. 23129
Issued in February 2017, Revised in February 2019
NBER Program(s):The Economic Fluctuations and Growth Program, The Productivity, Innovation, and Entrepreneurship Program

We develop a methodology to disentangle sources of capital ‘misallocation’, i.e. dispersion in value-added/capital. It measures the contributions of technological/informational frictions and a rich class of firm-specific factors. An application to Chinese manufacturing firms reveals that adjustment costs and uncertainty, while significant, explain only a modest fraction of the dispersion, which stems largely from other factors: a component correlated with productivity and a fixed effect. Adjustment costs are more salient for large US firms, though other factors still account for bulk of the dispersion. Technological/ markup heterogeneity explains a limited fraction in China, but a potentially large share in the US.

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Document Object Identifier (DOI): 10.3386/w23129

Published: Joel M. David & Venky Venkateswaran, 2019. "The Sources of Capital Misallocation," American Economic Review, vol 109(7), pages 2531-2567. citation courtesy of

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