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Track T7-4: Market power, markups and asset prices
Time:
Tuesday, 21/May/2024:
11:30am - 12:15pm
Session Chair: Erik Loualiche, University of Minnesota Discussant: Martin Souchier, Wharton School, University of Pennsylvania
Location:Room 601
Presentations
Investing in Misallocation
Mete Kilic, Selale Tuzel
University of Southern California
We document that 20% of Compustat firms have above-median investment rates despite having below-median marginal product of capital (MPK), seemingly "misallocating" productive resources. These firms are typically younger and significantly more likely to experience a substantial upward jump in their sales and MPK in the following years. They account for a significant share of innovative activity and their investments predict future aggregate productivity in the economy, creating value in ways not captured by their MPK. We propose and estimate a simple endogenous firm growth model that captures the key features of the cross-section of firms and allows for counterfactual analysis. Hypothetical firm investment policies that ignore the potential for future jumps reduce MPK and investment dispersion but also lower aggregate productivity.