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MISALLOCATION OF RESOURCES, TOTAL FACTOR PRODUCTIVITY, AND THE CLEANSING HYPOTHESIS

Published online by Cambridge University Press:  02 October 2020

George Vachadze
George Vachadze*
Affiliation:
City University of New York
*
Address correspondence to: George Vachadze, Department of Economics, College of Staten Island and Graduate Center, City University of New York, Staten Island, NY 10314, USA. e-mail: george.vachadze@csi.cuny.edu.
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Abstract

Imperfections in the credit market can hamper the flow of factors from less productive to more productive firms and result in a lower aggregate total factor productivity (TFP). Depth of such misallocation will depend on per capita income, the level of imperfections in the credit market, and the distribution of entrepreneurial productivity. Under some parameter configurations, we find that per capita income and TFP may affect each other so that an economic boom may cause higher resource misallocation, lower TFP, and economic recession. At the same time, an economic recession may have a “cleansing effect” on TFP leading to a lower resource misallocation, higher TFP, and economic boom. In other words, economic success may breed the failure and the failure can become a precondition for success so that the boom-bust cycles in resource misallocation, TFP, and per capita income may become endogenous.

Keywords

Cleansing HypothesisEndogenous FluctuationsImperfections in the Credit MarketMalinvestmentResource MisallocationTotal Factor Productivity
Type
Articles
Information
Macroeconomic Dynamics , Volume 26 , Issue 4 , June 2022 , pp. 1035 - 1072
Copyright
© 2020 Cambridge University Press

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Footnotes

I benefited from comments and suggestions made by Thomas Hauner, Richard Nugent, and Bryan Weber. This work was supported by the Provost’s Research Scholarship Award and City University of New York PSC-CUNY Research Award TRADA-46-127.

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