Distortions In Allocation Research Articles

Covid‐19 pandemic and its impact on capital and output distortions: Evidence from China

AbstractBased on Harrold's neutral technological progress production function, this paper studies the impact of Covid‐19 on output distortion and capital mismatch of China's A‐share listed firms in 2006–2022. It also identifies the ‘positive transmission’ and ‘backward forcing’ mechanisms of this impact effect. The empirical results suggest that there existed positive output distortion and negative capital allocation distortion and the pandemic is found to have exacerbated such distortions, especially in the manufacturing and services industries, the central and eastern regions, high‐tech industries and private firms. In the ‘positive transmission’ mechanism, reducing capital cost and improving technological progress are found to have restrained the distortions induced by the pandemic. In the ‘backward forcing’ mechanism, reducing product price is found to have reduced the distortions, but promoting market share competition is only found to have mitigated output distortion. There is heterogeneity in the efficiency of the transmission mechanisms between industries, regions, technological industry and ownership types. This study provides a solid theoretical basis and empirical evidence guiding central and regional authorities on how to alleviate resource allocation distortions and improve firm performance in response to an unexpected external shock such as the Covid‐19 pandemic.

Memahami Ancaman Venture Capital Zombie Terhadap Stabilitas Ekonomi: Analisis Dampak Modal Ventura Yang Tidak Produktif Pada Keseimbangan Finansial Global

This research examines the "Venture Capital Zombie" phenomenon and its implications for global economic stability. "Venture Capital Zombie" refers to venture capital firms that continue to operate despite being unable to generate significant profits or innovations. This study employs secondary data analysis, literature review, and policy analysis to minimize the economic impact of zombie venture capital. The research findings indicate that this phenomenon can hinder innovation, create resource allocation distortions, and increase systemic risk. The Financial Services Authority (OJK) in Indonesia has identified this issue and is preparing regulations to address it. This study suggests the need for stricter supervision, investment diversification, and better risk mitigation strategies to reduce the negative impact of "venture capital zombies." The conclusions of this research provide valuable insights for policymakers and financial practitioners in efforts to maintain global economic stability.

Measurement of labor reallocation effect in China

Improving the labor reallocation effect can promote the transformation of the driving force of economic growth and enable high-quality development. Therefore, this study constructs a growth source model from the perspective of human capital, considering labor price distortion and time-varying factor elasticity to measure the effect of labor reallocation under the crossover of provincial industries and analyze the impact of labor reallocation on employment share. The relevant findings are threefold. Aoki (2012)) The distortion of labor price is the largest in the primary industry, followed by the tertiary and secondary industries. Bai and Liu (2018)) Measuring the labor reallocation effect from the perspective of human capital allocation reveals a 3.7 % overall loss of the effect under allocation distortion compared with that under effective allocation. Bakas et al. (2017)) In terms of industrial structure adjustment, compared with the labor share under effective allocation, that of the primary industry still requires a 0.25 reduction, and that of the secondary and tertiary industries should be reduced by 0.07 and 0.18, respectively. The research results provide valuable insights for Chinese policymakers to further improve the market economy system and adjust the industrial structure to optimize resource allocation and advance economic growth.

Cardinium symbionts are pervasive in Iranian populations of the spider mite Panonychus ulmi despite inducing an infection cost and no demonstrable reproductive phenotypes when Wolbachia is a symbiotic partner.

Maternally transmitted symbionts such as Cardinium and Wolbachia are widespread in arthropods. Both Cardinium and Wolbachia can cause cytoplasmic incompatibility, a reproductive phenotype that interferes with the development of uninfected eggs that are fertilized by infected sperm. In haplodiploid hosts, these symbionts can also distort sex allocation to facilitate their spread through host populations. Without other fitness effects, symbionts that induce strong reproductive phenotypes tend to spread to high and stable infection frequencies, whereas variants that induce weak reproductive phenotypes are typically associated with intermediate and variable frequencies. To study the spread of Cardinium in a haplodiploid host, we sampled Iranian populations of the economically important spider mite Panonychus ulmi in apple orchards. Within several field populations, we also studied the Wolbachia infection frequencies. All P. ulmi field populations carried a Cardinium infection and exhibited high infection frequencies. In contrast, Wolbachia frequency ranged between ca. 10% and ca. 70% and was only found in co-infected mites. To test whether Cardinium induce reproductive phenotypes in P. ulmi, a Cardinium-cured derived line was generated by antibiotic treatment from a co-infected field population. Genetic crosses indicated that Cardinium do not induce demonstrable levels of cytoplasmic incompatibility and sex allocation distortion in co-infected P. ulmi. However, Cardinium infection was associated with a longer developmental time and reduced total fecundity for co-infected females. We hypothesize that Cardinium spread through P. ulmi populations via uncharacterized fitness effects and that co-infection with Wolbachia might impact these drive mechanisms.

Egg provisioning explains the penetrance of symbiont-mediated sex allocation distortion in haplodiploids.

Maternally transmitted symbionts such as Wolbachia can alter sex allocation in haplodiploid arthropods. By biasing population sex ratios towards females, these changes in sex allocation may facilitate the spread of symbionts. In contrast to symbiont-induced cytoplasmic incompatibility (CI), the mechanisms that underpin sex allocation distortion remain poorly understood. Using a nuclear genotype reference panel of the haplodiploid mite Tetranychus urticae and a single Wolbachia variant that is able to simultaneously induce sex allocation distortion and CI, we unraveled the mechanistic basis of Wolbachia-mediated sex allocation distortion. Host genotype was an important determinant for the strength of sex allocation distortion. We further show that sex allocation distortion by Wolbachia in haplodiploid mites is driven by increasing egg size, hereby promoting egg fertilization. This change in reproductive physiology was also coupled to increased male and female adult size. Our results echo previous work on Cardinium symbionts, suggesting that sex allocation distortion by regulating host investment in egg size is a common strategy among symbionts that infect haplodiploids. To better understand the relevance that sex allocation distortion may have for the spread of Wolbachia in natural haplodiploid populations, we parametrized a model based on generated phenotypic data. Our simulations show that empirically derived levels of sex allocation distortion can be sufficient to remove invasion thresholds, allowing CI to drive the spread of Wolbachia independently of the initial infection frequency. Our findings help elucidate the mechanisms that underlie the widespread occurrence of symbionts in haplodiploid arthropods and the evolution of sex allocation.

Allocating scarce resources in the presence of private information and heterogeneous favoritism

Motivated by the challenge of allocating scarce resources from the federal government to different states during the COVID‐19 pandemic, this paper studies optimal schemes for allocating scarce resources to agents with private demand information under different favoritism structures. Through an investigation of a mechanism design model that aims to induce agents to report their demands truthfully, we find the following results. First, when the principal purely cares about social welfare and when the principal has sufficient resources to satisfy all agents' demands, we find that the optimal allocation scheme is efficient in the sense that it is identical to the optimal scheme for the “benchmark” case when favoritism differentials and information asymmetry are both absent. Second, when rationing is needed due to resource scarcity, we show that heterogeneity in “event‐independent” favoritism across agents will cause the principal to allocate more resources to agents with larger favoritism and less resources to others, resulting in inefficient allocations. Third, when agents possess heterogeneous “event‐specific” favoritism due to the existence of outside options, the resulting allocation may boost all agents' expected utilities, including those agents who do not have any outside option. Finally, we show that the “allocation distortion” caused by both information asymmetry and heterogeneous favoritism can be reduced when “positive externality” is present (i.e., allocating resources to one agent can benefit other agents).

Impact of regional energy allocation distortion on carbon emission efficiency: Evidence from China

The free flow of energy cannot be fully achieved in China's energy market because of incomplete market-oriented reform, resulting in energy allocation distortion, which has hampered carbon emissions reduction. However, the extent of energy allocation distortion and its role in carbon emission efficiency remain unexplored. Therefore, this study aims to measure energy allocation distortion and investigate its impact on carbon emission efficiency. For this purpose, first, we derive energy allocation distortion based on a production function and carbon emission efficiency using a meta-frontier non-radial Malmquist index. To effectively address the endogeneity issue, we use a generalized method of moments model to estimate the impact of energy allocation distortion on carbon emission efficiency. Second, we further explore the distortionary mechanism of carbon emission efficiency associated with energy allocation and analyze the asymmetric effect of energy allocation distortion on carbon emission efficiency. The results show a certain degree of energy allocation distortion throughout the country, and disparity exists among different regions. The average value of carbon emission efficiency in the eastern region is 1.0286, well ahead of the national average, demonstrating better performance than other regions. Energy allocation distortion negatively affects carbon emission efficiency, with a 1% increase in energy allocation distortion leading to a 0.251% decrease in carbon emission efficiency. Technological progress, the structure of energy consumption, and industrial structure are important transmission channels through which energy allocation affects carbon emission efficiency. The study contributes to uncovering regional energy allocation distortion and its impacts on carbon emission efficiency and providing strategic policy recommendations for improving energy allocation efficiency.

China's Financial System and Economy: A Review

China's financial system has been integral to its spectacular economic growth over the past 40 years. We review the recent literature on China's financial system and its connections to the Chinese economy based on the categories of Aggregate Financing to the Real Economy (AFRE), a broad measure of the nation's yearly flow of liquidity accounting for unique features of China's financial system. While early work on China's financial system emphasizes the state-owned enterprise reform, the recent literature explores other more market-based financing channels—including shadow banking—that grew rapidly after 2010 and have become important components of AFRE. These new financing channels not only are intertwined with each other, but also, and more importantly, are often ultimately tied back to the dominant banking sector in China. Understanding the mechanisms behind these channels and their intrinsic connections is crucial to alleviate capital allocation distortion and mitigate potential systemic financial risk in China.

Go with the Politician

Chinese local leaders are frequently moved across prefectures. By combining local leader rotation data and comprehensive firm land parcel purchase data across prefectures from 2006 to 2016, this paper examines how firm–politician connections affect resource allocation and finds that a firm headquartered in a leader’s previous work prefecture purchases three times more land parcels in that leader’s new governing prefecture than the prefecture-year mean, at half the unit prices. Identification is from within-firm-year variation in various prefectures through exogenous politician rotation. Land usage efficiency is lower for these follower firms’ land parcels. Land allocation distortion is also economically sizable. (JEL D22, D72, O17, O18, P25, P26)

The Role of Big Data in Promoting Green Development: Based on the Quasi-Natural Experiment of the Big Data Experimental Zone.

Against the backdrop of the pressing issue of global warming, the concept of green development, which emphasizes the rational utilization of resources and energy, has emerged as a viable model for future economic growth. Despite this, the interplay between big data technology and green development has yet to receive due consideration. This study aims to shed light on the role of big data in green development from the perspective of factor configuration distortion. To this end, a panel data analysis of 284 prefecture-level cities spanning from 2007 to 2020 was conducted, utilizing the Difference-in-Differences (DID) and Propensity Score Matching-Difference-in-Differences (PSM-DID) models to assess the impact of the establishment of the National Big Data Comprehensive Experimental Zone on green total factor productivity. The findings reveal that the establishment of the National Big Data Comprehensive Experimental Zone has a positive impact on green total factor productivity, primarily through optimizing the capital and labor allocation distortions, with the effect being more pronounced in areas with high levels of human capital, financial development, and economic activity. This research provides empirical evidence to evaluate the impact of the establishment of the National Big Data Comprehensive Experimental Zone and offers valuable policy implications for the pursuit of high-quality economic development.

Can digital finance reduce carbon emission intensity? A perspective based on factor allocation distortions: evidence from Chinese cities.

The world is facing the challenges of climate change and energy structure adjustments. The role of digital finance, a new branch of business that combines digital technology and traditional financial products, in reducing global carbon emissions needs to be studied. This paper uses panel data on 280 cities in China from 2011 to 2019 to empirically examine the efficacy of digital finance for governing carbon emission reductions and the mechanism by which it does so. The results show that (1) digital finance can facilitate carbon emission reductions and help reduce carbon emission intensity within regions; (2) digital finance helps promote the rational allocation of resources and alleviates factor distortions by encouraging firms to rationally use their own factor endowments so as to reduce carbon emission intensity, which holds robustly after considering the endogenous issues such as possibly omitting variables and collinearity; and (3) differences in geographical location, the vitality of regional innovation and entrepreneurship, regional willingness to protect the environment, and environmental protection levels lead to heterogeneity in the effect of digital finance on carbon emission intensity. Therefore, it is necessary to vigorously develop digital finance as a long-term tool for carbon governance.

Sequential Screening with Type-Enhancing Investment

Due to the well-known efficiency–rent extraction trade-off, the optimal mechanism in a pure screening environment (e.g., revenue maximization in auctions or cost minimization in procurement) typically calls for distortions in allocative efficiency when agents possess private information at the time of contracting. In this paper we introduce first-stage type-enhancing hidden investment to a standard sequential screening model of procurement, and find that (i) with convex investment cost, mitigation of allocative distortion must arise; and (ii) such mitigation can even be extreme with linear investment cost—procurement cost minimization must require social efficiency when the investment is sufficiently effective. (JEL D44, D82, H57)

Quid pro quo

AbstractThis paper attempts to shed some new light on two puzzles about Chinese economy: Rapid economic growth despite pandemic corruption; dramatic development of the private sector despite ‘ownership discrimination' in financial resource allocation. In our model, the productive bribe facilitates the more efficient private firm to obtain the scarce financial resource, either from the bank or from the state‐owned enterprise, and corrects the initial allocation distortion. Meanwhile, our model also generates the distortionary and the predatory bribes which hurt the economy.

Energy structure dividend, factor allocation efficiency and regional productivity growth-- An empirical examination of energy restructuring in China

This paper introduces the energy structure variables into the generalized cost function from the dual perspective of energy "structural dividend" and factor allocation distortion. It quantitatively estimates the factor allocative efficiency, cost elasticity and marginal cost of the energy decarbonization practice in China from 2004 to 2019. Estimation results show that: (i) there is a "structural dividend" effect of energy restructuring in China. On average, a 1% increase in the level of decarbonization of the energy structure reduces the total cost by 0.57% and the marginal cost by 5.846 billion yuan. Specifically, a 1% reduction in the share of coal consumption reduces the marginal cost by 4.590 billion yuan. (ii)Energy restructuring has accelerated factor allocation distortions in recent years. In terms of the impact of energy decarbonization on productivity growth, the inhibition of factor allocation distortion on productivity growth mainly comes from scale effect. (iii)Energy restructuring has a heterogeneous impact on productivity growth across provinces. Productivity growth in energy-consuming regions is lower than that in energy-supplying regions, while the regions where factor allocation distortions have a greater impact on productivity growth are mostly found in the central and western parts of the country where factor markets are less developed.

Unintended consequences of heavy air pollution control: efficiency losses, resource misallocation, and firm innovation in China.

Disentangling the heterogeneous effects of environmental regulations on firms' productivity and reducing the destructive effects of policies are important for achieving the goal of sustainable development. However, there is insufficient discussion of the micro-mechanisms of regulation. This study takes advantage of the good exogenous impact of China's first action plan, the Atmosphere Ten Articles, which has been formulated and implemented to solve prominent environmental problems, and constructs a difference-in-difference model based on the data of listed companies from 2012 to 2019. Results show that the policy generally has a significantly negative impact on the companies' TFP. This finding proved to be valid after a series of robustness tests, such as replacing the explained variables, eliminating the impact of penecontemporaneous policies, using propensity score matching, and applying instrumental variable methods. Due to the resource allocation mechanism, the policy undermines the companies' TFP, especially those in PM2.5 regulatory areas and state-owned companies. However, the strict emission reduction constraint instead pushes firms to innovate, and as a result, the policy's innovation mechanism promotes firms' productivity, which eventually offsets the negative effects arising from resource allocation distortions.

Endogenous growth under multiple uses of data

We model a dynamic data economy with fully endogenous growth where agents generate data from consumption and share them with innovation and production firms. Different from other productive factors such as labor or capital, data are nonrival not only among firms but also in their uses across sectors, which affect both the level and growth of economic outputs. Despite the vertical nonrivalry, the innovation sector dominates the production sector in data usage and contribution to growth because (i) innovations are cumulative and benefit from data that are durable and dynamically nonrival; and (ii) innovations “desensitize” raw data into knowledge when entering production, which allays consumers’ privacy concerns. Data uses in both sectors interact in generating allocative distortions and an apparent substitutability due to labor’s rival usage across sectors and complementarity with data. Consequently, growth rates diverge under a social planner and a decentralized equilibrium, which is novel in the literature and has policy implications. Specifically, consumers’ failure to fully internalize knowledge spillover while bearing privacy costs, combined with firms’ market power, leads to an underpricing of data and inefficient data supply, causing underemployment in the innovation sector and suboptimal long-run growth. Improving data usage efficiency is ineffective in mitigating the underutilization of data, but interventions in the data market and direct subsidies hold promises.

International financial integration and total factor productivity losses from underdeveloped domestic financial markets

This paper explores the role of international financial integration in the association between total factor productivity (TFP) and domestic financial development. Using a heterogeneous-agent model with financial frictions, we compare TFP losses from underdeveloped domestic financial markets between a state of financial autarky and a state of financial integration. The model predicts that economies under integration are less affected by financial frictions than under autarky. The main mechanism is the role of integration in improving the efficacy of self-financing: even with an underdeveloped domestic financial system, agents under integration overcome financial frictions more easily by accumulating their internal capital and, thus, financial frictions translate into smaller distortions in resource allocation along the intensive and extensive margins than under autarky. Using data for 138 countries during 1970–2017, we estimate the role of integration in TFP effect of financial development. The empirical results are consistent with the model’s prediction.

Is ESG investing contributing to transitioning to a sustainable economy or to the greatest misallocations of capital and a missed opportunity?

Environmental, Social and Governance (ESG) investing has become a focus not only of the asset management industry but also among policy makers as a way to mobilise capital for sustainable economic development. While this could be the mechanism through which capital is allocated to companies and technology of the future to help transition to a net-zero sustainable economy and to deliver on the UN SDGs, all of the ‘noise’ around ESG reporting coupled with the ESG ‘investing frenzy’ may more likely end up being the greatest misallocation of capital and a missed opportunity. Asset owners’ strong interest in investing in ‘green’ assets to transition to a net-zero sustainable economy has led to a growing trend of asset managers labelling and rebranding mutual funds and ETFs as ESG and even mainstream funds are advertising employing ‘ESG integration’. At the same time, significant ‘greenwashing’ exits at the company reporting level due to the lack of agreed standards. Moreover, poor correlations across ESG score providers for a given company as well as intentional built-in biases introduced into the scoring and the total lack of any analysis taking into account ecological ceilings, sustainability thresholds and outer boundary limits of natural resources, will all likely lead to material capital allocation distortions. ‘Greenwashing’ at both the asset manager and the corporate level and the resultant misallocation of capital is likely setting the stage for potential risks including significant macroeconomic and geopolitical risks, as well as risks to the financial markets and financial institutions.

Strengthening European Union fisheries by removing harmful subsidies

Harmful fisheries subsidies have historically contributed to fleet overcapacity and continue to be allocated to the fishing industry to artificially maintain its profitability. However, in this contribution we show that removing harmful subsidies and reducing overfishing will help to recover the resource biomass, subsequently leading to increased levels of sustainable catches, income and well-being of fishers, and reduces inequities in income and consumption when fish stocks are not effectively managed. Maintaining harmful fisheries subsidies is socially and economically inefficient. Taking the example of the EU fishing fleet, one of the largest fishing fleets in the world, we use the total factor productivity to show that small-scale fishing fleet's productivity is almost two-fold in the North Atlantic and 16% higher in the Mediterranean and Black seas compared to large-scale vessels. This result is explained because the harmful fisheries subsidies disproportionately allocated to large-scale vessels introduce distortions in the efficient allocation of inputs. With critical WTO negotiations ongoing regarding the global rules on fisheries subsidies, the EU must take advantage of the opportunity to lead a desirable transformative change while also supporting developing nations to truly achieve global sustainable and equitable fisheries.

Can energy quota trading reduce carbon intensity in China? A study using a DEA and decomposition approach

Energy quota trading (EQT) is a market-driven method to reduce distortions in energy allocation. In 2016, an EQT policy was proposed in China. However, the economic and environmental effects of this new policy remain unclear. To study these problems, this paper conducts an empirical analysis using data envelopment analysis (DEA) and index decomposition analysis (IDA). Following a simulation of the optimal energy input and maximum output in three sectors of the 30 Chinese provinces that have adopted China's EQT policy, the main conclusions are as follows: (1) The energy consumption of the industrial sectors is excessive, yet the primary and service sectors need further energy input, while there is vast economic potential in China's western provinces and the service sectors. (2) The optimal energy intensity effect generated by the trading policy is the largest impetus of carbon intensity reduction in China, but the obstacles to carbon intensity reduction are different in each region. (3) EQT has the potential to drive a significant decline in carbon intensity in China, resulting in a simulated average annual decline of approximately 4.09% from 2005 to 2016.