Collateral, Reallocation, and Aggregate Productivity: Evidence from the U.S. Housing Boom

Abstract

This paper shows that rising real estate prices reduce industry productivity, because they lead to a reallocation of capital and labor towards inefficient firms. I establish that the rise in real estate value during the US housing boom relaxes firms' financial constraints. Companies borrow additional funds to invest, hire labor, and increase output. However, firms holding real estate are significantly less productive than non-holders. Rising real estate prices thus reallocate capital and labor towards inefficient firms. This has significant negative consequences for aggregate industry productivity. I find that industries with stronger growth in real estate value see a significant reduction in total factor productivity growth. A 10 % increase in real estate value lowers TFP growth by 0.62 %. The negative effect is driven by misallocation. To shed light on the role of financial sector, I show that banks with superior information about borrowers are better at identifying productive borrowers and supply less credit to unproductive firms when collateral values rise. My results provide direct evidence that financial frictions drive misallocation and suggest a channel for reallocation's falling contribution to growth in recent years.

Capital Flows, Real Estate, and Local Cycles: Evidence from German Cities, Banks, and Firms

“…As a result, the credit supply to firms tied to these banks shrinks and their investment contracts. Doerr (2018) shows that, when property and land prices increase, firms with larger real estate holdings hire, invest, and produce more, but are less productive than firms with smaller real estate holdings in a sample of US public companies. Both Chakraborty, Goldstein and MacKinlay (2018) and Doerr (2018) study housing booms with credit booms.…”

“…The specification in Column (3) holds the firm share of tangible assets fixed at its 2008 level and inflates it with the city-level commercial real property price index, assuming that firms own most of their real estate assets in the city where their headquarters are located, in a manner similar to Chaney et al (2012) and Doerr (2018). Again, we find that banks shift their credit supply towards firms with more real estate collateral, even though the β coefficient is now estimated slightly less precisely.…”

“…To assess this hypothesis more formally, we first aggregate our firm-level data at the NAICS2 code industry level as in Doerr (2018). We then regress average industry TFP growth rates on the interaction between the GIPS spread and average industry-level shares of tangible assets, controlling for lagged TFP growth in addition to time and industry fixed effects.…”

“…These results are interesting as they stand in contrast to some other findings in the misallocation literature specifically focused on housing booms. For example, Doerr (2018) and Chakraborty et al (2018) document that real estate booms tend to distort credit and capital allocation, leading to sizable aggregate TFP losses. In contrast, we show that bank retrenchment, while causing higher property prices with varying intensities across cities, is not associated with lower productivity growth at the firm or industry-level, or increased TFP dispersion.…”

Capital Flows, Real Estate, and Local Cycles: Evidence from German Cities, Banks, and Firms

“…As a result, the credit supply to firms tied to these banks shrinks and their investment contracts. Doerr (2018) shows that, when property and land prices increase, firms with larger real estate holdings hire, invest, and produce more, but are less productive than firms with smaller real estate holdings in a sample of US public companies. Both Chakraborty, Goldstein and MacKinlay (2018) and Doerr (2018) study housing booms with credit booms.…”