Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/216386
Authors: 
Kwon, Ohyun
Fleisher, Belton M.
McGuire, William H.
Zhao, Min Qiang
Year of Publication: 
2020
Series/Report no.: 
IZA Discussion Papers 13074
Abstract: 
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.
Subjects: 
financial friction
regional capital flows
Chinese economy
JEL: 
R12
H3
E5
O5
F4
Document Type: 
Working Paper

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