Finance and Misallocation: Evidence from Plant-Level Data

TLDR

The study uses producer‑level data to assess how financial frictions affect total factor productivity. The authors model establishment dynamics, showing that financial frictions lower TFP by distorting entry and technology adoption and by creating capital return dispersion that causes misallocation. Model fits suggest misallocation causes only modest TFP losses, whereas low entry and technology adoption levels lead to larger productivity losses. JEL codes: E32, E44, F41, G32, L60, O33, O47.

Abstract

We use producer-level data to evaluate the role of financial frictions in determining total factor productivity (TFP). We study a model of establishment dynamics in which financial frictions reduce TFP through two channels. First, finance frictions distort entry and technology adoption decisions. Second, finance frictions generate dispersion in the returns to capital across existing producers and thus productivity losses from misallocation. Parameterizations of our model consistent with the data imply fairly small losses from misallocation, but potentially sizable losses from inefficiently low levels of entry and technology adoption. (JEL E32, E44, F41, G32, L60, O33, O47)