| By: |
Zheng (Michael) Song (University of Chicago, Booth School of Business);
Guiying (Laura) Wu (Division of Economics, School of Humanities and Social Sciences, Nanyang Technological University, Singapore, 637332) |
| Abstract: |
Capital market distortions lower aggregate productive efficiency by
misallocating re- sources. The existing literature infers such distortions
from the dispersion of the average revenue product of capital. However, the
methodology is subject to a set of identification issues: unobserved
heterogeneities in production technology and market power; capital ad-
justment costs with idiosyncratic shocks; and measurement errors in the data.
This paper develops a structural econometric approach of estimating capital
market distortions in en- vironments where all the above factors can be
present. Using representative firm-level data from Chinese manufacturing from
2004 to 2007, we find that capital market distortions imply aggregate revenue
losses of 40 percent. We also estimate distortions for U.S. manu- facturing
firms in Compustat. Improving capital allocation e¢ ciency to the level
observed among the Compustat firms would increase China's manufacturing
revenue by 31 percent. Finally, we propose a simplified approach, which
addresses the identification issues in a much more tractable way. |
| Keywords: |
capital market distortions, Chinese manufacturing, structural estimation, un-observed heterogeneities |
| JEL: |
C15 D92 E22 O16 O47 |
| Date: |
2013–06 |
| URL: |
http://d.repec.org/n?u=RePEc:nan:wpaper:1306&r=cna |