Financing Intermediate Inputs and Misallocation : Evidence from China’s Firm-Level Data

This paper studies the misallocation of intermediate inputs in China’s firm-leveldata, eliminating which would increase the average industry’s gross output by 2.93%.We document evidence of pre-pay and financial frictions on intermediate inputs behindthe misallocation. We build these frictions into a standard industry dynamics modelalong with adjustment costs and financial frictions on capital. Counterfactual experiments show that intermediate input frictions, primarily financial frictions, accountfor 10.8% of China’s gross output misallocation. Value-added gains from reallocatingcapital, labor, and intermediate inputs are smaller than those obtained when firms aremodeled as value-added producers, both in the model and the data