Capital Misallocation and Financial Development: A Sector-Level Analysis

33 Pages Posted: 10 Nov 2017

See all articles by Daniela Marconi

Daniela Marconi

Bank of Italy

Christian Upper

Bank for International Settlements (BIS)

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Date Written: November 2017

Abstract

This study investigates how financial development affects capital allocation across industries in a panel of countries at different stages of development (China, India, Mexico, Korea, Japan and the US) over the period 1980-2014. Following the approach proposed by Chari et al (2007) and Aoki (2012), we compute wedges for capital and labour inputs for 26 industrial sectors in the six countries and add them up to economy-wide measures of capital and labour misallocation. We find that more developed financial systems allocate capital investment more efficiently than less developed ones. If financial development is low, faster capital accumulation is associated with a worsening of allocative efficiency. This effect reverses for higher levels of financial development. Sectors with high R&D expenditures or high capital investment benefit most from financial development. These effects are not only statistically significant, they are also large in economic terms.

Keywords: factor allocation, total factor productivity, financial development

JEL Classification: E22, E23, O16, O47

Suggested Citation

Marconi, Daniela and Upper, Christian, Capital Misallocation and Financial Development: A Sector-Level Analysis (November 2017). BIS Working Paper No. 671, Available at SSRN: https://ssrn.com/abstract=3068801

Daniela Marconi (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Christian Upper

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

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