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Size-dependent financial frictions, capital misallocation, and aggregate productivity

Published online by Cambridge University Press:  01 July 2022

Xiaolu Zhu
Xiaolu Zhu*
Affiliation:
School of Economics, Huazhong University of Science and Technology, 1037 Luoyu Road, Wuhan 430074, China
*
Email: xiaolu_zhu@hust.edu.cn
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Abstract

This paper quantitatively examines the macroeconomic effects of size-dependent financial frictions on capital misallocation and aggregate total factor productivity. Based on panel data from China’s manufacturing sector, I find that among non-state-owned enterprises, (i) the dispersion of the marginal product of capital is large and persistent and (ii) large firms tend to have higher leverage, and lower mean and dispersion of the marginal product of capital than their small counterparts. This paper analyzes a dynamic stochastic general equilibrium model with heterogeneous agents and size-dependent financial frictions. By calibrating the model to a Chinese firm-level dataset, I show that in addition to matching the aforementioned stylized facts, the economy with a size-dependent borrowing constraint is able to reproduce the observed negative correlation between firm size and the marginal product of capital, as well as generate quantitatively modest TFP loss. Furthermore, ignoring firms’ size-dependent financing patterns may lead to an overstatement of TFP loss due to financial frictions.

Keywords

Financial frictionsaggregate productivitycapital misallocationsize-dependent policiesE23E44L60O43
Type
Articles
Information
Macroeconomic Dynamics , Volume 27 , Issue 5 , July 2023 , pp. 1345 - 1382
Copyright
© The Author(s), 2022. Published by Cambridge University Press

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Footnotes

*

I am grateful to two anonymous referees, William Barnett (Editor), an Associate Editor, Neha Bairoliya, Ariel Burstein, Brenda Samaniego de la Parra, Miroslav Gabrovski, Jang-Ting Guo, Paul Jackson, Bree Lang, Matthew Lang, Dongwon Lee, Florian Madison, Victor Ortego-Marti, Marlo Raveendran, and Yang Xie for their insightful comments and suggestions. Also, I would like to thank participants at the WEAI 94th Annual Conference, and participants at the ECON-GSA brown bag seminar and the Macroeconomic Theory Colloquium at the University of California, Riverside. This research was supported by the Fundamental Research Funds for the Central Universities, HUST: 2022WKYXQN021, and the Huazhong University of Science and Technology Double First-Class Funds for Humanities and Social Sciences (Development Economics Research Team).

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