Finance and Misallocation: Evidence from Plant-Level Data

Abstract

We use producer-level data to evaluate the role of financial frictions in determining total factor productivity (TFP). We study a model of establishment dynamics in which financial frictions reduce TFP through two channels. First, finance frictions distort entry and technology adoption decisions. Second, finance frictions generate dispersion in the returns to capital across existing producers and thus productivity losses from misallocation. Parameterizations of our model consistent with the data imply fairly small losses from misallocation, but potentially sizable losses from inefficiently low levels of entry and technology adoption. (JEL E32, E44, F41, G32, L60, O33, O47) Differences in GDP per capita across countries are large and mostly accounted for by differences in total factor productivity. A key challenge is to identify the sources of these large differences in TFP. Since financial markets are much less developed in poor countries, a hypothesis that has received much attention in recent years is that financial frictions are an important source of aggregate TFP losses. 1 Financial frictions can reduce aggregate productivity via two channels. First, they may distort entry and technology adoption decisions and thus reduce the productivity of individual producers. 2 Second, financial frictions may generate differences in the returns to capital across individual producers, and thus efficiency losses due to misallocation. 3 Our goal in this paper is to evaluate the strength of these two channels quantitatively, using establishment-level data for the manufacturing sectors of South Korea, a country with a relatively well-developed financial system, as well as China and Colombia, two countries with relatively low levels of financial development. ).We thank Vivian Yue for many useful conversations during an early stage of this project. We thank our discussants, Simon Gilchrist, Jan de Loecker, Ben Moll, Richard Rogerson, and Manuel Santos, and three anonymous referees, for valuable comments and suggestions. We have also benefited from conversations with

Credit Misallocation During the European Financial Crisis

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Capital Misallocation During the Great Recession

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