The Sources of Capital Misallocation

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.

Productivity Revisited: Shifting Paradigms in Analysis and Policy

“…In addition, David and Venkateswaran (2017) argue that theoretically just looking at dispersion is not enough to separate out all relevant effects and may overstate the possible contribution of adjustment effects to explaining dispersion. 4 They offer an integrated framework that combines ingredients of the two previous approaches, and uses not only dispersion, but several other statistical moments of the data to identify the respective importance of the individual effects.…”

“…Between One-Quarter and One-Half of the Dispersion in the Average Revenue Product of Capital Can Potentially Be Explained by Heterogeneity in Firm-Level TechnologiesSource:David et al 2018. Note: The figure presents a decomposition of the contribution of different determinants of the dispersion of the average revenue product of capital using the methodology ofDavid and Venkateswaran (2017).…”

Measuring Trends and Persistence in Capital and Labor Misallocation

“…A first source of concern is that capital might be subject to adjustment costs in investment ("time-to-build"), which can lead to a higher dispersion simply due to technology-driven adjustment processes, which in itself are not inefficient (see e.g. Cooper and Haltiwanger, 2006;Asker et al, 2014;David and Venkateswaran, 2019). The Hsieh and Klenow (2009) model neglects this distinction between technology-driven adjustment costs, such as the natural time needed to build a new plant, and wasteful frictions, such as the bureaucratic procedures of authorization that may delay the construction and activation of a new plant.…”

“…In order to explore whether adjustment costs are a significant driver of our measurement of misallocation we use the methodology of David and Venkateswaran (2019). The model is an extension of the Hsieh and Klenow (2009)…”

“…We assess the importance of some often raised conjectures (see e.g. David and Venkateswaran, 2019) to the modeling framework of Hsieh and Klenow (2009).…”