How to Use Natural Experiments to Estimate Misallocation
American Economic Review · 2023 · Volume 113 · Issue 4
Abstract
We propose a method to estimate the effect of firm policies (e.g., bankruptcy laws) on allocative efficiency using (quasi-)experimental evidence. Our approach takes general equilibrium effects into account and requires neither a structural estimation nor a precise assumption on how the experiment affects firms. Our aggregation formula relies on treatment effects of the policy on the distribution of output-to-capital ratios, which are easily estimated. We show this method is valid for a large class of commonly used models in macrofinance. We apply it to the French banking deregulation episode of the mid-1980s and find an increase in aggregate TFP of 5 percent.
Keywords
Banks, Depository Institutions, Micro Finance Institutions, Mortgages, Investment Banking, Venture Capital, Brokerage, Ratings and Ratings Agencies, Financial Institutions and Services: Government Policy and Regulation, Capital Budgeting, Fixed Investment and Inventory Studies, Capacity, Financing Policy, Financial Risk and Risk Management, Capital and Ownership Structure, Value of Firms, Goodwill, Business Taxes and Subsidies including sales and value-added (VAT)
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