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American Economic Review Vol. 104 No. 2 2014

Finance and Misallocation: Evidence from Plant-Level Data

Virgiliu Midrigan1; Daniel Yi Xu2

1 Department of Economics, New York University, 19 W. 4th Street, 6th FL, New York, NY 10012, and NBER (e-mail: ) · 2 Department of Economics, Duke University, 419 Chapel Drive, Box 90097, Durham, NC 27708-0097, and NBER (e-mail: )

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.

DOI
10.1257/aer.104.2.422
Volume
104
Issue
2
Pages
422-458
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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