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American Economic Review: Vol. 104 No. 2 (February 2014)

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Finance and Misallocation: Evidence from Plant-Level Data

Article Citation

Midrigan, Virgiliu, and Daniel Yi Xu. 2014. "Finance and Misallocation: Evidence from Plant-Level Data." American Economic Review, 104(2): 422-58.

DOI: 10.1257/aer.104.2.422

Abstract

We use producer-level data to evaluate the role of financial frictions in determining total factor productivity (TFP). We study a model of establishment dynamics in which financial frictions reduce TFP through two channels. First, finance frictions distort entry and technology adoption decisions. Second, finance frictions generate dispersion in the returns to capital across existing producers and thus productivity losses from misallocation. Parameterizations of our model consistent with the data imply fairly small losses from misallocation, but potentially sizable losses from inefficiently low levels of entry and technology adoption.

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Additional Materials

Online Appendix (665.75 KB) | Download Data Set (10.60 MB) | Author Disclosure Statement(s) (47.68 KB)

Authors

Midrigan, Virgiliu (NYU)
Xu, Daniel Yi (Duke U)

JEL Classifications

E32: Business Fluctuations; Cycles
E44: Financial Markets and the Macroeconomy
F41: Open Economy Macroeconomics
G32: Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
L60: Industry Studies: Manufacturing: General
O33: Technological Change: Choices and Consequences; Diffusion Processes
O47: Measurement of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence


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