MACRO Seminar: Eugene Tan: University of Toronto

Speaker

The Department Welcomes Professor Eugene Tan, University of Toronto

Biography

Eugene Tan is an Assistant Professor of Economic Analysis and Policy at the Rotman School of Management at the University of Toronto. His primary research is in the field of macroeconomics, with a specialization in entrepreneurship, firm dynamics, and income inequality.

Title

"Quantifying the Allocative Efficiency of Capital: The Role of Capital Utilization*"

Abstract

An increase in dispersion of average revenue product of capital (ARPK) across firms is commonly believed to reflect increased capital misallocation. We show this result depends on a common assumption that capital utilization is fixed; conversely, with endogenous utilization, greater utilization flexibility in responding to productivity shocks increases aggregate productivity—by improving allocative efficiency of capital services—, but also increases ARPK dispersion. We provide direct evidence supporting the mechanism and demonstrate counterfactuals where aggregate productivity gains are accompanied by higher ARPK dispersion. Lastly, we apply our framework to study the impact of a capital market reform in India and find that the reform reduced ARPK dispersion due to a convergence in utilization rates and not implicit capital costs, implying the reform increased misallocation. Conventional interpretation, however, would have implied decreased misallocation. Keywords: Productivity, Utilization, Maintenance, Investment