Risk-adjusted capital allocation and misallocation

Arbeitspapier

We develop a theory linking "misallocation," i.e., dispersion in marginal products of capital (MPK), to macroeconomic risk. Dispersion in MPK depends on (i) heterogeneity in firm-level risk premia and (ii) the price of risk, and thus is countercyclical. We document strong empirical support for these predictions. Stock market-based measures of risk premia imply that risk considerations explain about 30% of observed MPK dispersion among US firms and rationalize a large persistent component in firm-level MPK. Risk-based MPK dispersion, although not prima facie inefficient, lowers long-run aggregate productivity by as much as 6%, suggesting large "productivity costs" of business cycles.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper ; No. 2020-34

Classification and Topics

• Classification: Wirtschaft ; Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity ; Intertemporal Firm Choice: Investment, Capacity, and Financing ; Investment; Capital; Intangible Capital; Capacity ; Business Fluctuations; Cycles ; Asset Pricing; Trading Volume; Bond Interest Rates ; Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
• Subject: misallocation ; productivity ; costs of business cycles ; risk premia

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): David, Joel M. ; Schmid, Lukas ; Zeke, David
• Event: Veröffentlichung
• (who): Federal Reserve Bank of Chicago
• (where): Chicago, IL
• (when): 2020

Further information

• DOI: doi:10.21033/wp-2020-34
• Handle: http://hdl.handle.net/10419/244248
• Last update: 10.03.2025, 11:41 AM CET