TY  - JOUR
AU  - Midrigan, Virgiliu
AU  - Xu, Daniel Yi
TI  - Finance and Misallocation: Evidence from Plant-level Data
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 15647
PY  - 2010
Y2  - January 2010
DO  - 10.3386/w15647
UR  - http://www.nber.org/papers/w15647
L1  - http://www.nber.org/papers/w15647.pdf
N1  - Author contact info:
Virgiliu Midrigan
Department of Economics
New York University
19 W. 4th St.
New York, NY 10012
Tel: 212/992-8081
Fax: 212/995-4186
E-Mail: virgiliu.midrigan@nyu.edu

Daniel Xu
Department of Economics
Duke University
213 Social Science Bldg
419 Chapel Drive
Box 90097
Durham, NC 27708-0097
Tel: 919-660-1824
E-Mail: daniel.xu@duke.edu
AB  - We study a model of industry dynamics in which idiosyncratic risk is uninsurable and establishments are subject to a financing constraint. We ask: does the model, when parameterized to match salient characteristics of plant-level data (Colombia and South Korea), predict large aggregate TFP losses from misallocation of factors across productive units? Our answer is: no. We estimate financing frictions that are fairly large: one-half of the establishments in both countries are constrained and face an external finance premium of 5% on average. Efficient establishments are, nonetheless, able to accumulate internal funds and quickly grow out of their borrowing constraints. Parameterizations of the model that hinder this process of internal accumulation can, in principle, cause very large TFP losses. Such parameterizations are, however, at odds with important features of plant-level data, most notably the difference in returns to factors across establishments that expand/contract (young vs. old) and the variability and persistence of plant-level sales.
ER  -