A model of costly reallocation and aggregate productivity

Abstract

This paper studies the effects of capital reallocation on aggregate productivity. Capital reallocation (i.e., the flow of productive capital across firms through changes in ownership) is an important activity in the United States: on average, the total value of capital reallocation annually is 3 to 4 percent of U.S. GDP. Firms with lower productivity are more likely to be reallocated to more-productive firms, and they also experience increases in productivity after reallocation. I use a dynamic model of firm investment and capital reallocation to match these facts. In the model, increased participation in the acquisition market by heterogeneous firms results in an increase in aggregate labor productivity, while the productivity of capital declines due to decreasing returns to scale. With the calibrated model, I show that the increased reallocation of capital contributed 20 percent of the growth of aggregate labor productivity during the period 1985-1990, and 22 percent during the period 1995-2000.