Provincial Trade, Financial Friction and Misallocation in China

Arbeitspapier

We study the implications of financial-market imperfections on labor and capital misallocation in China. Financial friction stems from private sectors' credit constraints that limit the efficient use of capital relative to state firms. Our model can jointly explain labor flows out of and capital flows into the Chinese provinces with high capital market distortion. To formally test this hypothesis, we propose a measure of regional financial friction based on our model. We show that the underlying financial friction can be inferred by differences-in-differences in the market shares of private and state sectors and their marginal rental rates of capital. Our regression results show that our measure of financial friction has robust explanatory power regarding interprovincial capital and labor flows. Our structural analysis shows that improving financial friction in China can lead to 3.9% welfare gain in China.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: IZA Discussion Papers ; No. 13074

Classification and Topics

• Classification: Wirtschaft ; Size and Spatial Distributions of Regional Economic Activity
• Subject: financial friction ; regional capital flows ; Chinese economy

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Kwon, Ohyun ; Fleisher, Belton M. ; McGuire, William H. ; Zhao, Min Qiang
• Event: Veröffentlichung
• (who): Institute of Labor Economics (IZA)
• (where): Bonn
• (when): 2020

Further information

• Handle: http://hdl.handle.net/10419/216386
• Last update: 10.03.2025, 11:41 AM CET