"Financial Liberalization and Aggregate Productivity: The Microeconomic Channels "
Abstract
This paper analyzes the microeconomic channels by which financial liberalization affects aggregate productivity. We exploit cross-sectoral differences in external financial dependence and find that liberalization increases productivity disproportionately in industries heavily dependent on external finance. Next, we decompose industry productivity into an efficiency and an allocation term, measured by the firm size-productivity covariance, and find that productivity gains are driven entirely by an increase in the allocation term. According to our findings, improved allocation comes through a better allocation of capital, as opposed to labor: liberalization reduces the variance of the marginal product of capital across firms, reduces the covariance between firm productivity and marginal product of capital, and increases the covariance between firm market share and marginal product of capital. Finally, we find that financial liberalization increases the covariance between firm debt and marginal product of capital, which further confirms the key role of finance in the reallocation process.
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