Macroeconomics Seminar - Ying Feng (National University of Singapore)

Title: Firm Life-Cycle Learning and Misallocation

Abstract: Dispersion in marginal revenue products of capital (MRPK) across firms may lower aggregate productivity through misallocation. Using firm-level panel data from China, I document that MRPK dispersion decreases substantially with firm age, particularly before age five. Building on this novel fact, I propose a new interpretation of MRPK dispersion as resulting from firm life-cycle learning. To formalize this idea, I develop a quantitative model in which firms learn about their fundamental productivity as they age in a frictional market with endogenous exits. I find that omitting learning can lead to considerable overestimation of TFP losses from distortions correlated with productivity.