Collateral, Reallocation, and Aggregate Productivity: Evidence from the U.S. Housing Boom

66 Pages Posted: 5 Jun 2018 Last revised: 13 Jul 2018

See all articles by Sebastian Doerr

Sebastian Doerr

University of Zurich - Department of Economics

Date Written: May 24, 2018

Abstract

This paper shows that rising real estate prices reduce industry productivity, because they lead to a reallocation of capital and labor towards inefficient firms. I establish that the rise in real estate value during the US housing boom relaxes firms’ financial constraints. Companies borrow additional funds to invest, hire labor, and increase output. However, firms holding real estate are significantly less productive than non-holders. Rising real estate prices thus reallocate capital and labor towards inefficient firms. This has significant negative consequences for aggregate industry productivity. I find that industries with stronger growth in real estate value see a significant reduction in total factor productivity growth. A 10 % increase in real estate value lowers TFP growth by 0.62 %. The negative effect is driven by misallocation. To shed light on the role of financial sector, I show that banks with superior information about borrowers are better at identifying productive borrowers and supply less credit to unproductive firms when collateral values rise. My results provide direct evidence that financial frictions drive misallocation and suggest a channel for reallocation’s falling contribution to growth in recent years.

Keywords: collateral, misallocation, productivity, real estate, housing boom

JEL Classification: D22, D24, O16, O47, R3

Suggested Citation

Doerr, Sebastian, Collateral, Reallocation, and Aggregate Productivity: Evidence from the U.S. Housing Boom (May 24, 2018). Available at SSRN: https://ssrn.com/abstract=3184162 or http://dx.doi.org/10.2139/ssrn.3184162

Sebastian Doerr (Contact Author)

University of Zurich - Department of Economics ( email )

Schönberggasse 1
Office G-05
Zürich, 8004
Switzerland

HOME PAGE: http://www.sdoerr.com

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