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How to Use Natural Experiments to Estimate Misallocation

  • David Sraer
  • David Thesmar
American Economic Review
vol. 113, no. 4, April 2023
(pp. 906-38)
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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.

Citation

Sraer, David, and David Thesmar. 2023. "How to Use Natural Experiments to Estimate Misallocation." American Economic Review, 113 (4): 906-38. DOI: 10.1257/aer.20190609

Additional Materials

JEL Classification

  • G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages
  • G24 Investment Banking; Venture Capital; Brokerage; Ratings and Ratings Agencies
  • G28 Financial Institutions and Services: Government Policy and Regulation
  • G31 Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
  • G32 Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
  • H25 Business Taxes and Subsidies including sales and value-added (VAT)