Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/244248 
Year of Publication: 
2020
Series/Report no.: 
Working Paper No. 2020-34
Publisher: 
Federal Reserve Bank of Chicago, Chicago, IL
Abstract: 
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.
Subjects: 
misallocation
productivity
costs of business cycles
risk premia
JEL: 
D24
D25
E22
E32
G12
O47
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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