Capital Liquidity, Productivity Dispersion and Market Structure

35 Pages Posted: 22 Jun 2007

See all articles by Natarajan Balasubramanian

Natarajan Balasubramanian

Syracuse University - Whitman School of Management

Jagadeesh Sivadasan

University of Michigan, Stephen M. Ross School of Business; University of Michigan at Ann Arbor - Survey Research Center

Date Written: May 2007

Abstract

We propose an industry-level index of capital liquidity - defined as the share of used capital in aggregate industry capital expenditure - that relates (inversely) to sunkenness of capital investment. We then test the effect of capital liquidity on the dispersion and mean of industry productivity distributions, as well as on industry concentration measures using data on US manufacturing industries. As predicted by a standard model of industry equilibrium with heterogeneous firms, we find that an increase in the capital liquidity index is associated with a reduction in the productivity dispersion and an increase in the mean and median of the productivity distribution. In addition, we find that increase in capital liquidity is associated with a decline in industry concentration measures. This is consistent with predictions from the standard industry equilibrium model under certain empirically plausible assumptions about the distribution of firm productivity parameters. Our results are robust to the inclusion of a number of control variables proxying for sunk costs, fixed costs, trade competition, product substitutability, advertising and R\&D intensity and productivity persistence. Our results are also robust to using alternative measures of dispersion and concentration, and alternative methods of estimating total factor productivity.

Keywords: Asset specificity, sunk costs, concentration, productivity distribution

JEL Classification: L11, L60, D24

Suggested Citation

Balasubramanian, Natarajan and Sivadasan, Jagadeesh, Capital Liquidity, Productivity Dispersion and Market Structure (May 2007). Ross School of Business Paper No. 1089, Available at SSRN: https://ssrn.com/abstract=995835 or http://dx.doi.org/10.2139/ssrn.995835

Natarajan Balasubramanian

Syracuse University - Whitman School of Management ( email )

United States

Jagadeesh Sivadasan (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

University of Michigan at Ann Arbor - Survey Research Center ( email )

Ann Arbor, MI
United States

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