Capital Misallocation and Aggregate Factor Productivity

FRB of St. Louis Working Paper No. 2012-046A

31 Pages Posted: 24 Oct 2012

See all articles by Costas Azariadis

Costas Azariadis

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Leo Kaas

University of Konstanz - Faculty of Economics and Statistics; IZA Institute of Labor Economics

Date Written: October 1, 2012

Abstract

We propose a sectoral–shift theory of aggregate factor productivity for a class of economies with AK technologies, limited loan enforcement, and a constant production possibilities frontier. Both the growth rate and TFP respond to random and persistent endogenous fluctuations in the sectoral distribution of physical capital which, in turn, responds to reversible exogenous shifts in relative sector productivities. Surplus capital from less productive sectors is lent to more productive ones in the form of secured collateral loans, as in Kiyotaki–Moore (1997), and also as unsecured reputational loans suggested in Bulow–Rogoff (1989). Endogenous debt limits slow down capital reallocation, preventing the equalization of risk–adjusted equity yields across sectors. Economy–wide factor productivity and the aggregate growth rate are both negatively correlated with the dispersion of sectoral rates of return, sectoral TFP and sectoral growth rates. We also find highly volatile limit cycles in economies with small amounts of collateral.

Keywords: TFP, misallocation, sectoral shocks, collateral, reputation

JEL Classification: D90, E32, O47

Suggested Citation

Azariadis, Costas and Kaas, Leo, Capital Misallocation and Aggregate Factor Productivity (October 1, 2012). FRB of St. Louis Working Paper No. 2012-046A. Available at SSRN: https://ssrn.com/abstract=2166083 or http://dx.doi.org/10.2139/ssrn.2166083

Costas Azariadis (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Leo Kaas

University of Konstanz - Faculty of Economics and Statistics ( email )

Universitaetsstr. 10
78457 Konstanz
Germany

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

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