Preferential Credit Policy with Sectoral Markup Heterogeneity

49 Pages Posted: 29 May 2024

See all articles by Kaiji Chen

Kaiji Chen

Emory University - Department of Economics; Federal Reserve Bank of Atlanta

Yuxuan Huang

University of International Business and Economics

Zhikun Lu

Emory University - Goizueta Business School

Xuewen Liu

University of Hong Kong (HKU), HKU Business School

Yong Wang

Peking University- Institute of New Structural Economics

Abstract

Many emerging economies adopt preferential credit policies towards selected sectors. This paper provides an analysis of the economic rationale behind the preferential credit policies in the presence of market imperfections. Using firm-level data, we first empirically establish that sectors with higher markups are also those enjoying preferential credit subsidy. Disciplined by these empirical findings, we develop a multi-sector model featuring sectoral markup heterogeneity and endogenous firm entry and exit. We show that sector-specific preferential credit policies can be used to improve aggregate productive efficiency by reducing sectoral markup dispersion, despite the inefficiency introduced by allowing for less productive firms to enter and survive without exiting. We quantify the effect of preferential credit policy on aggregate TFP through the two opposite channels.

Keywords: preferential credit policy, sectoral markup heterogeneity, capital misallocation, inefficient firm entry and exit

Suggested Citation

Chen, Kaiji and Huang, Yuxuan and Lu, Zhikun and Liu, Xuewen and Wang, Yong, Preferential Credit Policy with Sectoral Markup Heterogeneity. Available at SSRN: https://ssrn.com/abstract=4847111 or http://dx.doi.org/10.2139/ssrn.4847111

Kaiji Chen (Contact Author)

Emory University - Department of Economics ( email )

1602 Fishburne Drive
Atlanta, GA 30322
United States

HOME PAGE: http://https://sites.google.com/site/chenkaiji/research

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

Yuxuan Huang

University of International Business and Economics ( email )

10 Huixindongjie, Chaoyang District
Beijing, 100029
China

Zhikun Lu

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

Xuewen Liu

University of Hong Kong (HKU), HKU Business School ( email )

Pokfulam Road
Hong Kong
China

HOME PAGE: http://xuewenliu.com/

Yong Wang

Peking University- Institute of New Structural Economics ( email )

Room 503, Langrun Garden
Haidian District
Beijing, Beijing 100871
China
+8618810668170 (Phone)

HOME PAGE: http://https://www.yongwangecon.com/

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