Misallocation

Paper Session

Sunday, Jan. 8, 2017 3:15 PM – 5:15 PM

Hyatt Regency Chicago, Plaza A
Hosted By: American Economic Association
  • Chair: Ezra Oberfield, Princeton University

Misallocation Cycles

Cedric Ehouarne
,
Carnegie Mellon University
Lars A. Kuehn
,
Carnegie Mellon University
David Schreindorfer
,
Arizona State University

Abstract

The goal of this paper is to quantify the cyclical variation in firm-specific risk and study its aggregate consequences via the allocative efficiency of capital resources across firms. To this end, we estimate a general equilibrium model with firm heterogeneity and a representative household with Epstein-Zin preferences. Firms face investment frictions and permanent shocks, which feature time-variation in common idiosyncratic skewness. Quantitatively, the model replicates well the cyclical dynamics of the cross-sectional output growth and investment rate distributions. Economically, the model generates business cycles through inefficiencies in the allocation of capital across firms, which amounts to an average output gap of 4.5% relative to a frictionless model. These cycles arise because (i) permanent Gaussian shocks give rise to a power law distribution in firm size and (ii) rare negative Poisson shocks cause time-variation in common idiosyncratic skewness. Despite the absence of firm-level granularity, a power law in the firm size distribution implies that large inefficient firms dominate the economy, which hinders the household's ability to smooth consumption.

A Tale of Two Sectors: Why is Misallocation Higher in Services Than in Manufacturing?

Daniel Dias
,
Federal Reserve Board
Carlos Robalo Marques
,
Bank of Portugal
Christine Richmond
,
International Monetary Fund

Abstract

Recent empirical studies documented that the level of resource misallocation in the service sector is significantly higher than in the manufacturing sector. In this paper, we try to understand to what extent the documented differences are due to methodological reasons or whether they reflect structural differences between the two sectors. Our results suggest that about 50 percent of the original estimated differences can be attributed to methodological choices, while the other 50 percent can be attributed to differences in the characteristics of the two sectors. Using the Gelbach omitted variable bias decomposition we find that differences in the effect and size of productivity shocks explain most of the difference in misallocation<br /><br />
between manufacturing and services that cannot be explained by methodological choices, while the remainder is explained by differences in the firm productivity and age distributions. We interpret such results as stemming mainly from higher output-price rigidity, higher labor adjustment costs and higher informality in the service sector.

Creditor Control Rights and Resource Allocation Within Firms

Rustom M. Irani
,
University of Illinois-Urbana-Champaign
Nuri Ersahin
,
University of Illinois-Urbana-Champaign
Hanh Le
,
University of Illinois-Chicago

Abstract

We examine the within-firm resource allocation and restructuring effects of creditor intervention and their relationship to performance gains at firms violating covenants in private credit agreements. By linking firms to establishment-level data from the U.S. Census Bureau, we demonstrate that covenant violations are followed by large reduc- tions in employment and more frequent establishment sales and closures. These cuts are concentrated in violating firms’ noncore business lines and underperforming establishments. We conclude that refocusing operations and improving productive e ciency are important channels through which creditors enhance violating firms’ performance.

Liquidity Windfalls and Reallocation: Evidence from Farming and Fracking

Richard Thakor
,
University of Minnesota

Abstract

Financing frictions may create a misallocation of assets in a market, thus depressing output, productivity, and asset values. This paper empirically explores how liquidity shocks generate a reallocation effect that diminishes this misallocation. Using a unique dataset of agricultural outcomes, I explore how farmers respond to a relaxation of financial constraints through a liquidity shock that is unrelated to farming fundamentals, namely exogenous cash inflows that are caused by an expansion of hydraulic fracturing (fracking) leases. Farmers who receive positive cash flow shocks increase their purchases of land, which results in a reallocation effect. Examining cross-county purchases, I find that farmers in high-productivity counties who receive cash flow shocks buy farmland in low-productivity counties. In contrast, when farmers in low-productivity counties receive positive cash flow shocks, they do not engage in similar behavior. Moreover, farmers increase their purchases of vacant (undeveloped) land. Average output, productivity, and profits all increase following these positive cash flow shocks, and farmland prices rise significantly. These effects are consistent with an efficient reallocation of land towards more productive users.
JEL Classifications
  • D2 - Production and Organizations