Capital Misallocation During the Great Recession

47 Pages Posted: 11 Sep 2017

See all articles by Alessandro Di Nola

Alessandro Di Nola

University of Konstanz - Department of Economics

Date Written: August 1, 2016

Abstract

In this paper I evaluate the contribution of financial frictions in explaining the drop in aggregate TFP through misallocation during the Great Recession. I build a quantitative model with heterogeneous establishments; with the help of the model I compute the counterfactual drop in misallocation: by how much would aggregate TFP have decreased if the credit crunch had been absent. I find that a "real recession" would have caused a drop of only 0.16 percent, as opposed to 1.04 percent found in the data; therefore financial frictions account for a significant part of the drop in aggregate TFP. The key mechanism is the following: the increase in the cost of external finance affects negatively the reallocation of productive inputs from low to high productivity firms, by dampening the growth of small-highly productive firms.

Keywords: Financing constraints, misallocation, heterogeneous firms, incomplete markets, idiosyncratic shocks

JEL Classification: D21, D22, E32, G31

Suggested Citation

Di Nola, Alessandro, Capital Misallocation During the Great Recession (August 1, 2016). Available at SSRN: https://ssrn.com/abstract=3033789 or http://dx.doi.org/10.2139/ssrn.3033789

Alessandro Di Nola (Contact Author)

University of Konstanz - Department of Economics ( email )

Universit├Ątsstra├če 10
Konstanz, 78457
Germany

HOME PAGE: http://www.sites.google.com/site/alessandrodinolaphd/

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