Alais Martin-Baillon, NYU Abu Dhabi

“Do firm heterogeneous expectations drive capital misallocation?”

Abstract

This paper empirically differentiates two sources of observed dispersion in the firms' marginal product of capital (MPK), commonly labeled as capital misallocation. One source is barriers preventing firms from equalizing their expected MPK with the marginal cost of capital. The second source stems from discrepancies between the expected MPK and the realized MPK. Understanding the causes of capital misallocation is crucial for determining the necessity and form of policy interventions. To investigate that, we use a quarterly panel survey of French firms' expectations, combined with administrative data, which allows us to analyze in depth the relationship between expectations and capital misallocation. We show that dispersion in firms' ability to forecast their own outcomes contributes to the observed dispersion in MPK. This suggests that observed dispersion in MPK may not solely indicate frictions that prevent firms from implementing their optimal investment plans but may also stem from imperfect information.

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