Sectoral Booms and Misallocation of Managerial Talent: Evidence from the Chinese Real Estate Boom

Abstract

This paper identifies a new mechanism leading to inefficiency in capital reallocation at theextensive margin when an economy experiences a sectoral boom. I argue that imperfectionsin the financial market and capital barriers to entry in the booming sector create amisallocation of managerial talent. Using comprehensive firm-level data from China, I firstprovide evidence that more productive firms reallocate capital to the booming real estatesector, and demonstrate that the pattern is likely driven by fewer financial constraints onthese firms. I then use a structural estimation to verify the talent misallocation. Finally, Icalibrate a dynamic model and find that the without the misallocation, the TFP growth in themanufacturing sector would have improved by 0.5% per year.