Econometrica

Journal Of The Econometric Society

An International Society for the Advancement of Economic
Theory in its Relation to Statistics and Mathematics

Edited by: Guido W. Imbens • Print ISSN: 0012-9682 • Online ISSN: 1468-0262

Econometrica: Jan, 2023, Volume 91, Issue 1

Misallocation and Capital Market Integration: Evidence From India

https://doi.org/10.3982/ECTA19039
p. 67-106

Natalie Bau, Adrien Matray

We show that foreign capital liberalization reduces capital misallocation and increases aggregate productivity for affected industries in India. The staggered liberalization of access to foreign capital across disaggregated industries allows us to identify changes in firms' input wedges, overcoming major challenges in the measurement of the effects of changing misallocation. Liberalization increases capital overall. For domestic firms with initially high marginal revenue products of capital (MRPK), liberalization increases revenues by 23%, physical capital by 53%, wage bills by 28%, and reduces MRPK by 33% relative to low MRPK firms. The effects of liberalization are largest in areas with less developed local banking sectors, indicating that inefficiencies in that sector may cause misallocation. Finally, we propose an assumption under which a novel method exploiting natural experiments can be used to bound the effect of changes in misallocation on treated industries' aggregate productivity. These industries' Solow residual increases by 3–16%.


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Supplemental Material

Supplement to "Misallocation and Capital Market Integration: Evidence From India"

Natalie Bau and Adrien Matray

This online appendix contains material not found within the manuscript.

Supplement to "Misallocation and Capital Market Integration: Evidence From India"

Natalie Bau and Adrien Matray

This zip file contains the replication files for the manuscript.