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The Sources of Capital Misallocation

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  • Joel M. David
  • Venky Venkateswaran

Abstract

We develop a methodology to disentangle sources of capital ‘misallocation’, i.e. dispersion in value-added/capital. It measures the contributions of technological/informational frictions and a rich class of firm-specific factors. An application to Chinese manufacturing firms reveals that adjustment costs and uncertainty, while significant, explain only a modest fraction of the dispersion, which stems largely from other factors: a component correlated with productivity and a fixed effect. Adjustment costs are more salient for large US firms, though other factors still account for bulk of the dispersion. Technological/ markup heterogeneity explains a limited fraction in China, but a potentially large share in the US.
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Suggested Citation

  • Joel M. David & Venky Venkateswaran, 2017. "The Sources of Capital Misallocation," Working Papers 17-06, New York University, Leonard N. Stern School of Business, Department of Economics.
    • Handle: RePEc:ste:nystbu:17-06
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    More about this item

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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