Working Paper: NBER ID: w18030
Authors: Sebnem Kalemli-Ozcan; Bent E. Sorensen
Abstract: We study capital misallocation within and across 10 African countries using the World Bank Enterprise Surveys. First, we compare the extent of misallocation among firms within countries. We document high variation in firms' marginal product of capital (MPK), implying that countries could produce significantly more with the same aggregate capital stock if capital were allocated optimally. Such variation differs from country to country with some African countries (success stories) closer to developed country benchmarks. Small firms and non-exporters have less access to finance and have higher returns to capital in general. Self reported measures of obstacles to firms' operations suggest access to finance is the most important obstacle: A firm with the worst access to finance has MPK 45 percent higher than a firm with the worst access to finance as a result of low capital per worker. We compare average levels of the MPK across countries, finding evidence that the strength of property rights and the quality of the legal system help explain country-level differences in capital misallocation.
Keywords: Capital Misallocation; Property Rights; Access to Finance; Africa
JEL Codes: F40; O10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Limited access to finance (O16) | Higher marginal product of capital (mpk) (E22) |
| Weak property rights (P14) | Higher capital misallocation (D29) |
| Quality of the legal system (K40) | Higher capital misallocation (D29) |
| Higher strength of property rights (P14) | Lower capital misallocation (D29) |
| Obstacles to credit (G21) | Inefficient capital allocation (D61) |