Events at CERGE-EI

Sergi Basco, Ph.D.

Universitat Autònoma de Barcelona, Spain

Authors: Sergi Basco, David Lopez-Rodriguez, and Enrique Moral-Benito

Abstract: During the 2000s, several developed economies experienced a housing bubble. At the same time, productivity growth started to decline. Spain is a paradigmatic example. We use unique matched firm- and bank-level data to empirically analyze the effects of the housing bubble on the allocation of capital and credit across firms. We focus on manufacturing firms (robust to consider non-financial market economy). We employ housing supply elasticity at the municipality level (based on land availability) as an instrument for house price growth. We find empirical evidence that the housing bubble increased misallocation and reduced total factor productivity (TFP). We identify two types of misallocation: (i) industry and (ii) geographical misallocation. Given the municipality, firms with a larger share of real estate assets (over total assets) increased their investment, whereas firms with less real estate assets decreased their investment (industry misallocation). This difference in investment across firms was exacerbated in municipalities with lower housing supply elasticity (geographical misallocation). We derive the same misallocation results for credit given to firms. Our interpretation is that the housing bubble generated misallocation through the change in the value of the collateral of firms, which depended on both the composition of assets and the location of the firm.

Keywords: Bubbles, Housing, Misallocation, Credit.

JEL Classification: E22, E44, O16, O47.

Full Text:  “Housing Bubbles and Misallocation: Evidence from Spain”