Expropriation Risk and Aggregate Productivity with Heterogeneous Firms

In this paper, I propose a general equilibrium model featuring heterogeneous firms and a government that is both unable to commit and relatively more impatient than firms. I find that, as predicted by theoretical papers on limited commitment, the threat of expropriation alone is enough to distort capital accumulation. Moreover, I show that the fact that the government is more impatient than firms induces additional growth dynamics by determining that distortions to capital do not completely go away once the long run stationary equilibrium has been reached. This is because the relative impatience of the government leads not only to decreases in promised utility by the firm when constraints do not bind, but also makes it very costly for a firm to increase its promised utility and capital when a constraint binds. Thus, promised utility will not increase as much as in the case where government and firms discount at the same rate, resulting in a stationary equilibrium level of capital that is less than optimal. Finally, when embedding the contracting problem between a firm and the government in a GE model with heterogeneous firms, I find that expropriation risk is capable of endogenously generating misallocation of resources across firms, with more productive firms being affected the most by the contracting frictions, thus leading to losses in aggregate output and total factor productivity in the long run stationary equilibrium.