“A Structural Estimation on Capital Market Distortions in UK and Chinese Manufacturing Firms ” by Guiying Wu
Nanyang Technology University
Zheng Michael Song
University of Chicargo
Capital market distortions which drive wedges across firms in their marginal revenue product of capital will lower the aggregate revenue total factor productivity. However, inferring such distortions from the dispersion of marginal revenue product of capital is subject to a set of identification issues: unobserved heterogeneities in production and demand, investment frictions with idiosyncratic shocks, and measurement errors in the data. This paper estimates the capital market distortions and accounts for alternative sources of dispersion using a structural econometric approach. We .find a magnitude of distortions that is much smaller than the literature but is still significantly large, which implies a 9.3% and 37.5% aggregate revenue total factor productivity loss in UK and China. We show that missing unobserved heterogeneities in production and demand will cause a severe upward bias in the estimation of distortions. We also find that small, private-owned .firms without political connection in east China face unfavorable capital market distortions.