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Do Firms Mitigate or Magnify Capital Misallocation? Evidence from Plant-Level Data

55 Pages Posted: 10 Feb 2017 Last revised: 20 Apr 2017

Matthias Kehrig

Duke University

Nicolas Vincent

HEC Montreal - Institute of Applied Economics

Date Written: February 11, 2017

Abstract

Almost two thirds of the cross-plant dispersion in marginal revenue products of capital occurs across plants within the same firm rather than between firms. Even though firms allocate investment very differently across their plants, they do not equalize marginal revenue products across their plants. We reconcile these findings in a model of multi-plant firms, physical adjustment costs and credit constraints. Credit constrained multi-plant firms can utilize internal capital markets by concentrating internal funds on investment projects in only a few of their plants in a given period and rotating funds to another set of plants in the future. The resulting increase in within-firm dispersion of marginal revenue products of capital is hence not a symptom of misallocation within the firm, but rather actions taken by the firm to mitigate external credit constraints and adjustment costs of capital. Economies with multi-plant firms produce more aggregate output despite higher dispersion in marginal revenue products of capital compared to economies with single-plant firms. Because emerging economies are predominantly populated by single-plant firms, the gains from reducing their distortions to the level of developed are larger than previously thought.

Keywords: Misallocation, Productivity Dispersion, Multi-Plants Firms, Internal Capital Markets

JEL Classification: E2, G3

Suggested Citation

Kehrig, Matthias and Vincent, Nicolas, Do Firms Mitigate or Magnify Capital Misallocation? Evidence from Plant-Level Data (February 11, 2017). US Census Bureau Center for Economic Studies Paper No. CES-WP-17-14; CESifo Working Paper Series No. 6401. Available at SSRN: https://ssrn.com/abstract=2731594 or http://dx.doi.org/10.2139/ssrn.2731594

Matthias Kehrig (Contact Author)

Duke University ( email )

237 Social Sciences
Box 90097
Durham, NC 27708-0097
United States

HOME PAGE: http://sites.google.com/site/matthiaskehrig/research

Nicolas Vincent

HEC Montreal - Institute of Applied Economics ( email )

3000, ch. de la Côte-Ste-Catherine
Montréal, Quebec H3T 2A7
Canada

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