Álvaro Aguirre, Banco Central de Chile

Sala 209

“Financial Frictions, Assets Dynamics and Production Function Estimation”

Coautoreado con Matías Tapia y Lucciano Villacorta

Abstract: We develop a framework to jointly estimate the productivity process and the assets dynamic decision of firms that face financial constraints. We show that standard approaches for estimating productivity (e.g. Olley-Pakes) underestimate the marginal effect of capital and the dispersion of the productivity distribution. We propose a flexible non-linear framework to jointly model and estimate the firm assets accumulation dynamics, the unobservable productivity process and the unobservable firm-secific financial friction. The empirical model consists of the production function, the assets dynamic decision of the firm and the investment decision of the firm. When applying our estimators to the population of chilean firms we show that the estimated marginal effect of capital in the production function increases from 0.30 (with Olley-Pakes) to 0.41. We also find a significantly larger dispersion of the productivity distribution, a larger degree of persistence in individual productivities and a more positive correlation of firm productivities with capital and assets, when comparing to the Olley-Pakes estimator. We estimate a firm-specific process of asset accumulation that is a function of the unobservable productivity shocks and the intensity of financial frictions, and explore the implications of these estimations to the quantitative models exploring the effects of financial frictions on the economy.