Misallocation and Asset Prices

45 Pages Posted: 10 Apr 2020 Last revised: 16 Jul 2024

See all articles by Winston Wei Dou

Winston Wei Dou

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

Yan Ji

Hong Kong University of Science & Technology (HKUST)

Di Tian

Hong Kong University of Science & Technology (HKUST) - Department of Finance

Pengfei Wang

Peking University HSBC Business School

Multiple version iconThere are 2 versions of this paper

Date Written: April 25, 2024

Abstract

We develop an endogenous growth model with heterogeneous firms facing financial frictions, where misallocation emerges explicitly as a crucial endogenous state variable and plays a significant role in driving economic growth through the valuation channel. The model illustrates that transient macroeconomic shocks affecting misallocation can yield persistent effects on aggregate growth. In equilibrium, slowmoving misallocation endogenously generates long-run uncertainty about economic growth by distorting innovation decisions. When agents hold recursive preferences, misallocation-driven low-frequency growth fluctuations result in substantial risk premia in capital markets and large losses in consumer welfare. Employing a misallocation measure motivated by the model, we substantiate our findings with empirical evidence showing that misallocation effectively captures low-frequency fluctuations in both aggregate growth and asset returns.

Keywords: Distribution of firms, Financial frictions, Endogenous growth, Intangible q, Stochastic discount factor, Welfare costs of economic fluctuations JEL Classification: L11, O30, O40

JEL Classification: L11, O30, O40.

Suggested Citation

Dou, Winston Wei and Ji, Yan and Tian, Di and Wang, Pengfei, Misallocation and Asset Prices (April 25, 2024). Available at SSRN: https://ssrn.com/abstract=3540012 or http://dx.doi.org/10.2139/ssrn.3540012

Winston Wei Dou (Contact Author)

University of Pennsylvania - The Wharton School ( email )

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Philadelphia, PA 19104-6365
United States

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
United States

HOME PAGE: http://www.nber.org/people/winston_wei_dou?page=1&perPage=50

Yan Ji

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

Di Tian

Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )

Clear Water Bay Kowloon
Hong Kong

Pengfei Wang

Peking University HSBC Business School ( email )

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