Industry Dynamics with Bubbles

Abstract

Asset price bubbles play an important role in resource allocation and affect the industry dynamics. We use the Chinese Stock market data and the micro data for manufacturing firms in China between 1998 and 2007 to develop an estimation on industry dynamics from four channels including intra-sector misallocation, sector-level expansion, firms' mobility and market concentration. The main findings suggest that asset bubbles lower allocative efficiency so as to reduce sector-level total factor productivity (TFP), increase firms' exit rate, block firms' mobility and lower concentration levels.

Keywords: Asset bubble, Industry dynamics, Misallocation, Mobility, Concentration

JEL Classification: D24, L16, L60, O47