Misallocation Losses Owing to Financial Distortions: Direct Evidence From Dispersion in Borrowing Costs

We develop an accounting methodology to map observed differences in borrowing costs into measures of aggregate resource misallocation that may plausibly be attributed to financial market imperfections. Using a log-normal approximation we show that this resource misallocation may be inferred from cross-industry or cross-country information on the dispersion in borrowing costs. We apply our accounting methodology to U.S. Compustat data. Despite fairly large and persistent differences in borrowing costs across firms, our estimates imply relatively modest losses in TFP owing to resource misallocation that is attributable to such differences -- roughly on the order of 1% of total TFP for the United States. We also find that increasing the dispersion in borrowing costs by a factor of 2 only leads to a TFP loss of 3%. To obtain a TFP loss of 17% one must increase the dispersion in borrowing costs by a factor of 10 relative to U.S. data.