Title: Policy, Productivity and Misallocation
Ana María Herrera (chair)
Mark H. Liu (Department of Finance & Quantitative Methods)
Policy and Misallocation
with Ana María Herrera and Steven Lugauer
We investigate the effect of industrial policies on resource misallocation using a rich data-set of Chinese firms. Using a difference-in-difference approach, we provide evidence that government policies favoring particular industries lead to increased resource misallocation (i.e., an increase in the dispersion of revenue productivity across firms in four-digit industries). Moreover, the differential changes between supported and not supported industries are quantitatively large and indicative of a substantial negative impact on aggregate TFP. Using a changes-in-changes model, we find evidence that the Five Year Plan had a positive and significant effect for most of the TFPR distribution while the effect was negative for the lowest quintile of TFPQ and positive for the highest TFPQ quintile. Our results suggest increased misallocation is related to the way in which the Chinese government doled support through the increase of subsidies and the improvement of credit conditions for a subset of firm
Unequal Effects of Industrial Policy
I study the heterogeneous effects of an industrial policy -the 10th Five-Year Plan -on resource misallocation, profitability and real technology in Chinese provinces with different supporting intensities. The intensity of the policy varies across provinces and the impact of the industrial policy is found to be unequal on resource allocation, profitability and real technology across provinces. Specifically, the 10th Five-Year Plan increases resource misallocation, profitability and technology of supported sectors in provinces with higher supporting intensities. After controlling the effects of China’s state-owned enterprise reforms and joining into World Trade Organizations, the results are still robust and consistent.