Misallocation and Asset Prices / Winston Wei Dou, Yan Ji, Di Tian, Pengfei Wang.

Format:

Book

Author/Creator:

Dou, Winston Wei.

Contributor:

National Bureau of Economic Research.

Ji, Yan.

Tian, Di.

Wang, Pengfei.

Series:

Working Paper Series (National Bureau of Economic Research) no. w32147.

NBER working paper series no. w32147

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2024.

Summary:

We develop an endogenous growth model with heterogeneous firms facing financial frictions, where misallocation emerges explicitly as a crucial endogenous state variable and plays a significant role in driving economic growth through the valuation channel. The model illustrates that transient macroeconomic shocks affecting misallocation can yield persistent effects on aggregate growth. In equilibrium, slow-moving misallocation endogenously generates long-run uncertainty about economic growth by distorting innovation decisions. When agents hold recursive preferences, misallocation-driven low-frequency growth fluctuations result in substantial risk premia in capital markets and large losses in consumer welfare. Employing a misallocation measure motivated by the model, we substantiate our findings with empirical evidence showing that misallocation effectively captures low-frequency fluctuations in both aggregate growth and asset returns.

Notes:

Print version record

February 2024.