Finance and Misallocation: Evidence from Plant-level Data / Virgiliu Midrigan, Daniel Yi Xu.

Format:

Book

Author/Creator:

Midrigan, Virgiliu.

Contributor:

National Bureau of Economic Research.

Xu, Daniel Yi.

Series:

Working Paper Series (National Bureau of Economic Research) no. w15647.

NBER working paper series no. w15647

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Finance and Misallocation

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2010.

Summary:

We study a model of industry dynamics in which idiosyncratic risk is uninsurable and establishments are subject to a financing constraint. We ask: does the model, when parameterized to match salient characteristics of plant-level data (Colombia and South Korea), predict large aggregate TFP losses from misallocation of factors across productive units? Our answer is: no. We estimate financing frictions that are fairly large: one-half of the establishments in both countries are constrained and face an external finance premium of 5% on average. Efficient establishments are, nonetheless, able to accumulate internal funds and quickly grow out of their borrowing constraints. Parameterizations of the model that hinder this process of internal accumulation can, in principle, cause very large TFP losses. Such parameterizations are, however, at odds with important features of plant-level data, most notably the difference in returns to factors across establishments that expand/contract (young vs. old) and the variability and persistence of plant-level sales.

Notes:

Print version record

January 2010.