Measurement of capital allocation efficiency in emerging economies: evidence from China

Abstract

In the process of economic growth, emerging economies such as China usually experience technological bias and structural changes, showing the characteristics of time-varying factor income shares. In order to accurately measure the capital allocation efficiency of emerging economies, we explore the impact mechanism of capital optimization on the economy. Based on the idea of a “uniform marginal return on capital”, this paper improves the “function estimation method”, and proposes the use of a time-varying elasticity production function model to estimate time-varying capital output elasticity, in order to measure China's regional capital allocation efficiency. The research results show the average capital allocation efficiency from 2005 to 2017 was 0.957 in Eastern China, 0.934 in Central China, and 0.884 in Western China, an indication that deepening marketization has greatly improved capital allocation efficiency in the country's three major regions. The Cobb-Douglas production function ignores the technology bias and structural changes in the social development of emerging economies, thereby losing 4.6–6.6% of the optimization space for capital allocation, while the time-varying elasticity production function with structural change effect can provide an alternative new production function to measure the capital allocation efficiency of China and other emerging economies.