Volatility, Adjustment Cost and Capital Misallocation: Evidence from Chinese Industrial Firms
30 Pages Posted: 4 Mar 2021 Last revised: 5 Nov 2021
Date Written: January 4, 2021
This paper investigates the impact of volatility in profitability shock and capital adjustment cost on aggregate total factor productivity (TFP) in Chinese industries firms. To quantify the effects of volatility and adjustment costs on aggregate TFP, we recover key structural parameters in a dynamic optimization problem, so the model is able to replicate salient features observed from the firm-level data. Our result shows that volatility leads to considerable loss in aggregate TFP, while the role of adjustment cost is limited but significant.
Keywords: volatility, capital adjustment cost, capital misallocation, aggregate TFP, China
JEL Classification: D24, O10, P31
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