Finance and misallocation: Evidence from plant-level data

Virgiliu Midrigan, Daniel Yi Xu

    Research output: Contribution to journalArticle

    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.

    Original languageEnglish (US)
    Pages (from-to)422-458
    Number of pages37
    JournalAmerican Economic Review
    Volume104
    Issue number2
    DOIs
    StatePublished - Feb 1 2014

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    ASJC Scopus subject areas

    • Economics and Econometrics

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