Misallocation and Capital Market Integration: Evidence From India

By N. Bau, Adrien Matray, David M. Donaldson, E. Farhi, Pete Klenow, K. Muralidharan, Diego Restuccia, Richard Rogerson, Martin Rotemberg, Chad Syverson and 5 more. Social Science Research Network, 2020

117 citations recorded by the source corpus.

We show that foreign capital liberalization reduces capital misallocation and increases aggregate productivity for affected industries in India. The staggered liberalization of access to foreign capital across disaggregated industries allows us to identify changes in firms' input wedges, overcoming major challenges in the measurement of the effects of changing misallocation. Liberalization increases capital overall. For domestic firms with initially high marginal revenue products of capital (MRPK), liberalization increases revenues by 23%, physical capital by 53%, wage bills by 28%, and reduces MRPK by 33% relative to low MRPK firms. The effects of liberalization are largest in areas with less developed local banking sectors, indicating that inefficiencies in that sector may cause misallocation. Finally, we propose an assumption under which a novel method exploiting natural experiments can be used to bound the effect of changes in misallocation on treated industries' aggregate productivity. These industries' Solow residual increases by 3–16%.

View Paper: https://www.semanticscholar.org/paper/56580de272b17de791874560bebd01d93b568f8c

Citations in the corpus

• The local innovation spillovers of listed firms (2021, unknown): “…on fixed characteristics, while a few recent papers are exploring how finance can produce changes in these agglomeration forces both within countries (e.g. Hombert and Matray, 2017 for the U.S., Bau and Matray, 2020 for India), sectors (Hombert and Matray, 2019) and across countries (Xu, 2019).”