Topic: The Scarring Effect of Recessions on Capital Misallocation: Evidence from GFC Shock in Indonesia

Speaker: CHEN Xiaoguang, University of Western Australia Business School

Time: March 21, 2025, 14:30

Venue: EMS 121

Abstract:

This study examines the sources of the scarring effect of capital misallocation across sectors in the aftermath of a recession, utilizing Indonesian firm-level data spanning from 2002 to 2014. Leveraging the 2008 Global Financial Crisis (GFC) as an exogenous shock, we employ a Difference-in-Differences (DiD) approach to assess how capital misallocation responded, particularly comparing capital-intensive and labor-intensive industries. Our results show a significant post-GFC increase in capital misallocation within capital-intensive industries relative to labor-intensive ones. The results also underscore the usefulness of labor-intensive industries as a control group to absorb common shocks in all sectors. To quantify the contribution of factors driving the observed rise in misallocation, we further apply the decomposition method proposed by David and Venkateswaran (2019). The findings indicate that correlated distortions were the primary contributor to the post-GFC increase in misallocation (58%). Surprisingly, adjustment costs and uncertainty played only minimal role. These insights highlight the pivotal role of industry capital intensity and correlated distortions in shaping the persistent increase of capital misallocation following a recession, offering critical insights for policies aimed at mitigating its long-term economic impact.

Guest Bio:

Dr. CHEN Xiaoguang is an Associate Professor at the UWA Business School, The University of Western Australia. He holds a PhD from the London School of Economics and Political Science (LSE) as well as a PhD from Peking University. He is also a Research Fellow at several institutions, including the Tax and Transfer Policy Institute (TTPI) at the Australian National University, the National Institute of Fiscal Studies (NIFS) at Tsinghua University, and the Institute of Public Finance and Taxation (IPFT) at Renmin University of China. His research examines how tax systems and rent-seeking affect productivity, economic development, and growth. As a sole author, he has published in leading English and Chinese academic journals such as the Journal of Public Economics, Journal of Law, Economics, and Organization, Social Sciences in China, and Economic Research Journal. He has received the Gregory Chow Best Paper Award and the Best Paper Award at the inaugural China Public Finance Forum.