Information, Misallocation, and Aggregate Productivity *

Abstract

We propose a theory linking imperfect information to resource misallocation and hence to aggregate productivity and output. In our setup, firms look to a variety of noisy information sources when making input decisions. We devise a novel empirical strategy that uses a combination of firm-level production and stock market data to pin down the information structure in the economy. Even when only capital is chosen under imperfect information, applying this methodology to data from the United States, China, and India reveals substantial losses in productivity and output due to the informational friction. Our estimates for these losses range from 7% to 10% for productivity and 10% to 14% for output in China and India, and are smaller, though still significant, in the United States. Losses are substantially higher when labor decisions are also made under imperfect information. We find that firms turn primarily to internal sources for information; learning from financial markets contributes little, even in the United States.

Endogenous Uncertainty and Credit Crunches

“…26 The calibration implies a relative contribution of the credit supply signal to investors' learning between 2 and 5 percent. This is broadly consistent with David, Hopenhayn and Venkateswaran (2015) who find that the information contained in stock market prices contributes between 2 and 8 percent to learning about firm fundamentals at a 3-year horizon. Note: All target moments are exactly matched by the calibrated learning parameters.…”

“…shares with us the combination of information heterogeneities with financial frictions, but considers a static model with a constant level of uncertainty. David, Hopenhayn and Venkateswaran (2015) also analyze information frictions as a source for factor misallocation, but focus on long-run consequences rather than fluctuations driven by financial shocks.…”

Making Do With What You Have: Conflict, Input Misallocation and Firm Performance

“…We contribute to this literature by identifying conflict as an additional determinant of factor misallocation, with a specific focus on developing countries. Moreover, the suggestive evidence we present on the relationship between conflict, uncertainty, bargaining power with foreign suppliers and use of imported inputs is also in line with recent contributions in the literature which specifically investigate the impact of uncertainty on resource misallocation in the economy (Bloom, 2009;Asker et al, 2014;David et al, 2016).…”

Competition and the Welfare Gains from Transportation Infrastructure: Evidence from the Golden Quadrilateral of India

“…A recent example of this kind of work is David, Hopenhayn, and Venkateswaran (2015), which studies misallocation within a framework that has information frictions. Furthermore, a natural way of approaching this agenda is to use natural experiments to shed light on promising mechanisms.…”