Access to Finance, Bureaucracy, and Capital Allocation Efficiency

Abstract

We study the degree and determinants of capital allocation efficiency across firms, using comprehensive firm-level survey data that covers a broad spectrum of developing countries. As measured by the dispersion in firms’ marginal revenue product of capital, we document that capital misallocation is pervasive in firms within the same industry in a country. We find that limited access to finance, bureaucracy, information asymmetry, and gender inequality play essential roles in impeding the most efficient allocation of capital across firms in developing countries. By employing the quantile regression technique, we show these factors exert more significant effects on firms that are already highly distorted (i.e., have too little capital). The results have direct policy implications; in particular, governments could achieve a more efficient allocation of capital by eliminating these distortions to enhance economic performance.