Misallocation and Finance
Sunday, Jan. 7, 2018 8:00 AM - 10:00 AM
- Chair: David Sraer, University of California-Berkeley
The Financing of Ideas and the Great Deviation
AbstractWhy did the Great Recession lead to such a slow recovery? I build a model where
heterogeneous firms invest in physical and intangible capital, and can default on their
debt. In case of default, intangible assets are harder to seize by creditors. Hence,
intangible capital faces higher financing costs. This differential is exacerbated in a
financial crisis, when default is more likely and aggregate risk bears a higher premium.
The resulting fall in intangible investment amplifies the crisis, and gradual intangible
spillovers to other firms contribute to its persistence. Using panel data on Spanish
manufacturing firms, I estimate the model matching firm-level moments regarding intangibles
and financing. The model captures the extent and components of the Great
Recession in Spanish manufacturing, whereas a standard model without endogenous
intangible investment would miss more than half of the GDP fall. A policy of transfers
conditional on firm observables could mitigate the recession.
The Misallocation of Finance
AbstractWe estimate the real losses that accrue from the cross-sectional misallocation of financial liabilities by extending the framework of Hsieh and Klenow (2009) to the liabilities side of the balance sheet. Using manufacturing firm data from the United States and China, we find significant misallocation of debt and equity. Although financial liabilities appear well allocated in the United States, they are not in China. If China’s debt and equity markets were as developed as those in the United States, China would realize gains of 40%-55% in terms of real firm value-added. We estimate firm-level costs of debt and equity, inclusive of allocation distortions. In China, we find markedly lower costs for larger firms and firms located in more developed cities.
Capital Misallocation: Frictions or Distortions?
AbstractWe 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 firm-specific 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.
- G00 - General
- E22 - Investment; Capital; Intangible Capital; Capacity