UC Riverside

This dissertation consists of three essays that investigate the macroeconomic effects of resource misallocation. Chapter 1 provides an overview of this dissertation. Chapter 2 studies the macroeconomic effects of size-dependent financial frictions on capital misallocation and aggregate productivity. Based on the Chinese firm-level dataset, I find that among non-state-owned enterprises, (i) the dispersion of the marginal product of capital is significant and persistent and (ii) large firms tend to have higher leverage, and lower mean and dispersion of the marginal product of capital than their small counterparts. I analyze a dynamic stochastic general equilibrium model with heterogeneous agents and size-dependent financial frictions to match the stylized facts. I show that the economy with a size-dependent borrowing constraint can reproduce the observed negative correlation between firm size and the marginal product of capital and generate a TFP loss of 3.91%. Furthermore, ignoring firms' size-dependent financing patterns may lead to an overstatement of TFP loss due to financial frictions.

Chapter 3 studies the implications of financial development and financial reform policies on resource reallocation and aggregate productivity. I develop a general equilibrium model with heterogeneous private and state-owned firms, into which size-dependent financial frictions and equity issuance are incorporated. By calibrating the model to the Chinese economy, this chapter shows that financial reform has facilitated resource reallocation within and across the private and state sectors. The reallocation effects on the intensive margin due to reform policies account for most aggregate productivity and output gains. Besides, credit market development has played a more prominent role in promoting aggregate productivity and output than the equity market during the economic transition.

Chapter 4 investigates the impacts of factor market distortions on allocative efficiency by adopting a misallocation accounting framework with the gross output production structure and considering firm-specific distortions on capital, labor, and intermediate input. The empirical results suggest that the gross output gains by equalizing revenue productivity within sectors are 18.71% on average in the Chinese manufacturing sector. Despite the significant revenue share of gross output by intermediate input, reallocation gains from removing intermediate input distortion are smaller than that of capital and labor distortions. Although the wedge on intermediate input usage is not the primary source of misallocation, intermediate input possibly matters for the measured distortions and TFP gains.