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Working paper 744

Chaoran Chen, Ashique Habib, Xiaodong Zhu, "Finance, Managerial Inputs, and Misallocation", 2022-11-23
Main Text (application/pdf) (532,087 bytes)

Abstract: n standard macro-finance models, financial constraints mainly affect small or young firms but not large or old ones due to the self-financing mechanism, and the dispersion of marginal revenue product of capital (MRPK) of a firm cohort is less persistent than in the data. We extend a standard model by allowing firms to hire managers and large firms hire disproportionately more managers, consistent with data. In our model, financial constraints and the dispersion of MRPK persist, and even large firms are likely to be constrained. The productivity loss from financial frictions is also substantially amplified.

Keywords: Collateral Constraint, Managerial Inputs, Elasticity of Scale, Misallocation, Aggregate Productivity, China

JEL Classification: E13; G21; L16; L26; O16; O41