Finance Seminar（2018-28）

Topic: Contracting Frictions with Managers, Financial Frictions, and Misallocation

Speaker: Xiaodong Zhu, University of Toronto

Time: Wednesday, 21 November, 12:30-14:00

Location: Room K01, Guanghua Building 2

Abstract:

Weak contract enforcement prevents productive firms from hiring outside managers and expanding production in developing countries. We build a framework in which firms face both a financial friction and a contracting friction with managers. In our model, managers can steal a fraction of the firm's output, and firms overcome this friction by hiring fewer managers and increasing the compensation to managers. While the financial friction generates capital wedges mainly for smaller firms with insufficient collateral, the managerial friction generates output wedges that increase with firm size. We jointly quantify the impact of these two frictions on aggregate productivity using micro data from China. We find that, in the Chinese context, eliminating these two frictions can increase labor productivity by up to 16%. About half of the increase is from eliminating the managerial friction. The impact of financial frictions on productivity is amplified in our framework where firm management is endogenous, since the dispersion of marginal product of capital within a cohort of firms is more persistent over time. The model's prediction is also consistent with the data that the marginal product of labor increases with firm size. We further find that state-owned enterprises (SOE) have significantly more managers than private firms in China, which suggests that the managerial frictions may differ for the SOE's.

Introduction:

Xiaodong Zhu is a professor of economics at the University of Toronto and a visiting scholar at the PBC School of Finance, Tsinghua University. He obtained his Ph.D. in Economics from University of Chicago. He holds a B.S. in Mathematics and a M.S. in Mathematical Statistics from Wuhan University. His main research areas are macroeconomics, growth and development, and the Chinese economy. He has published many articles in leading economics journals such as the Journal of Political Economy, Journal of Monetary Economics, Journal of Economic Theory, and Journal of Development Economics.

http: //www.economics.utoronto.ca/xzhu

Your participation is warmly welcomed!