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Financial friction, resource misallocation and total factor productivity: theory and evidence from China

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  • Yanli Wang
  • Xiaodong Lei
  • Fan Yang
  • Na Zhao

Abstract

We explore the impact of financial friction on resource misallocation and total factor productivity (TFP) of China. First, the mathematical models are derived to clarify the mechanism and consequence of resource misallocation, showing that financial friction leads to resource mismatch, and thus results in the loss of TFP. Second, taking the dataset of China as the research sample, we establish econometric models to explore the impacts of financial friction on resource allocation and TFP. The results show that financial friction has negative impact on the TFP of China. In addition, the friction of financial markets will lead to factor distortion. Furthermore, the results of mechanism analysis demonstrate that resource misallocation is an important channel through which financial friction deteriorates the TFP of China, which is verified at the enterprise and province levels, respectively.

Suggested Citation

  • Yanli Wang & Xiaodong Lei & Fan Yang & Na Zhao, 2021. "Financial friction, resource misallocation and total factor productivity: theory and evidence from China," Journal of Applied Economics, Taylor & Francis Journals, vol. 24(1), pages 393-408, January.
    • Handle: RePEc:taf:recsxx:v:24:y:2021:i:1:p:393-408
    DOI: 10.1080/15140326.2021.1936836
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    Cited by:

    1. Ling-Yun He & Sha Liu, 2023. "Impact of China Railway Express on Regional Resource Mismatch—Empirical Evidence from China," Sustainability, MDPI, vol. 15(11), pages 1-17, May.
    2. Wang, Weilong & Wang, Jianlong & Wu, Haitao, 2024. "The impact of energy-consuming rights trading on green total factor productivity in the context of digital economy: Evidence from listed firms in China," Energy Economics, Elsevier, vol. 131(C).
    3. Xu Dong & Kejia Guo & Guizhi Xue & Yali Yang & Weili Xie & Chenguang Liu, 2023. "Environmental Regulation, Resource Misallocation, and Total Factor Productivity: An Empirical Analysis Based on 284 Cities at the Prefecture-Level and Above in China," IJERPH, MDPI, vol. 20(1), pages 1-15, January.
    4. Weng, Liying & Xu, Changsheng & Yi, Ming, 2024. "Resource misallocation in China: Biased subsidies versus credit discrimination," Economic Modelling, Elsevier, vol. 134(C).
    5. Mao, Wenxin & Sun, Huifang & Wang, Wenping & Luo, Dang, 2024. "Factor reallocation path for low-carbon transformation: A perspective of manufacturing industry ecosystem," Energy Economics, Elsevier, vol. 134(C).
    6. Min Zhong & Zengtao Wang & Siyi Du, 2023. "Can international students help increase China's total factor productivity?," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(2), pages 1162-1174, March.
    7. Jin, Laiqun & Cao, Kairui & Li, Jiaye & Xu, Qunfang, 2024. "Information infrastructure construction and optimization of resources allocation among firms: Evidence from “Broadband China” strategy," International Review of Economics & Finance, Elsevier, vol. 91(C), pages 36-53.
    8. Saifullah Khan & Adnan Shoaib, 2024. "Firm value adjustment speed through financial friction in the presence of earnings management and productivity growth: evidence from emerging economies," Palgrave Communications, Palgrave Macmillan, vol. 11(1), pages 1-17, December.

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