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Misallocation and Finance

Paper Session

Sunday, Jan. 7, 2018 8:00 AM - 10:00 AM

Marriott Philadelphia Downtown, Meeting Room 413
Hosted By: Econometric Society
  • Chair: David Sraer, University of California-Berkeley

Aggregating Estimates of Firm-level Capital Distorsions

David Sraer
University of California-Berkeley
David Thesmar
Massachusetts Institute of Technology


This paper develops a framework to aggregate firm-level estimates of capital distorsions, without estimating a structural model of firm behavior. Our aggregation approach allows to account for firm interactions on product and labor markets. We start with a general equilibrium model with heterogeneous firms. The firm dynamics model includes flexible forms of capital frictions: adjustment costs, taxes and financing constraints. We then consider a hypothetical micro treatment that affects distorsions for a subset of firms. The empiricist can measure firm-level behavioral responses to this micro treatment. We then derive formulas to compute the effect of hypothetically extending this micro treatment to all firms. Aggregate output and TFP are simple functions of moments of the measured effect of the micro treatment on the distribution of sales to capital ratios. Our aggregation formulas are simple, intuitive and hold for a large class of technological, tax and financial frictions.

The Financing of Ideas and the Great Deviation

Daniel Garcia-Macia
International Monetary Fund


Why 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

Toni Whited
University of Michigan
Jake Zhao
Peking University


We 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?

Joel M. David
University of Southern California
Venky Venkateswaran
New York University


We 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.
Benjamin Hebert
Stanford University
Ezra Oberfield
Princeton University
Eduardo Davila
New York University
Oleg Itskhoki
Princeton University
JEL Classifications
  • G00 - General
  • E22 - Investment; Capital; Intangible Capital; Capacity