Misallocation, Access to Finance, and Public Credit: Firm-Level Evidence

Miguel A. León-Ledesma,Dimitris Christopoulos

doi:10.1162/adev_a_00075

Miguel A. León-Ledesma, Dimitris Christopoulos

Open Access

https://doi.org/10.1162/adev_a_00075

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Abstract

Using a database of 23,000 firms in 45 economies, we test the quantitative importance of access to finance and access to public and private credit for the determination of misallocation. We first derive measures of factor market and size distortions, and then use these measures within a regression framework to test the significance of self-declared access-to-finance obstacles as well as the effect of access to a credit line issued by either a government-owned or private bank. We find that access-to-finance obstacles and private credit increase the dispersion of distortions. Public credit has a very small effect. For firms that do not face financial obstacles, public credit increases the dispersion of distortions; for firms that face financial obstacles, it slightly decreases dispersion. Public credit does not appear to compensate for the distortions that exist in private credit markets. Quantitatively, however, financial variables explain a very small part of the dispersion of factor market and size distortions.

Highlights

Recent literature has emphasized the role of misallocation in determining total factor productivity (TFP) differences between economies
Public credit does not appear to compensate for the distortions that exist in private credit markets
Misallocation implies that, with the same amount of capital, labor, and firm-level TFP, aggregate TFP can be higher if factors of production were reallocated between firms

Summary

Introduction

Recent literature has emphasized the role of misallocation in determining total factor productivity (TFP) differences between economies. Misallocation implies that aggregate TFP could be higher given the same amount of capital, labor, and firm-level TFP. Because of distortions that prevent factors of production from being allocated for their best use, firms with high productivity may be too small and firms with low productivity may be too large, leading to a fall in aggregate (weighted) TFP. One of the key distortions that may cause misallocation is the existence of financial access problems that generate quantity constraints and price dispersion in credit markets. In order to bypass these financial access distortions, governments often resort to public policies for the allocation of credit through government-owned credit institutions.

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