Access to finance, bureaucracy, and capital allocation efficiency

Abstract

We study the degree and determinants of capital allocation efficiency across firms, using comprehensive firm-level survey data covering a broad spectrum of developing countries. As measured by the dispersion in firms’ marginal revenue product of capital, we document that capital misallocation is pervasive. Limited access to finance, bureaucracy, information asymmetry, and gender inequality play essential roles in impeding the most efficient capital allocation. Quantile regression estimates indicate more significant effects of these factors on already highly distorted firms. The results have direct policy implications; governments could achieve a more efficient capital allocation by eliminating these distortions to enhance economic performance.