Faculty of Economics and Business Administration Publications Database

Capital Misallocation And Aggregate Factor Productivity

Azariadis, Costas
Volume: 20
Pages: 525 - 543
Month: March
ISSN-Print: 1365-1005
Link External Source: Online Version
Year: 2016
Keywords: TFP; misallocation; sectoral shocks; collateral; reputation

We propose a sectoral–shift theory of aggregate factor productivity for a class of economies with AK technologies, limited loan enforcement, and a constant production possibilities frontier. Both the growth rate and TFP respond to random and persistent endogenous fluctuations in the sectoral distribution of physical capital which, in turn, responds to reversible exogenous shifts in relative sector productivities. Surplus capital from less productive sectors is lent to more productive ones in the form of secured collateral loans, as in Kiyotaki–Moore (1997), and also as unsecured reputational loans suggested in Bulow–Rogoff (1989). Endogenous debt limits slow down capital reallocation, preventing the equalization of risk–adjusted equity yields across sectors. Economy–wide factor productivity and the aggregate growth rate are both negatively correlated with the dispersion of sectoral rates of return, sectoral TFP and sectoral growth rates. We also find highly volatile limit cycles in economies with small amounts of collateral.