Preferential credit policy with sectoral markup heterogeneity

Kaiji Chen, Yuxuan Huang, Xuewen Liu, Zhikun Lu, Yong Wang

Abstract

Many emerging economies employ preferential credit policies that target selected sectors. This paper quantifies the implications of such policies for aggregate productivity and welfare. Using Chinese firm-level data from 2009–2020, we first document that sectors with higher markups receive larger credit subsidies and exhibit higher revenue-based productivity. Motivated by these facts, we develop a multi-sector quantitative model with endogenously determined markups and calibrate it to match the distribution of sales both within and across sectors. We find that preferential credit subsidies raise aggregate productivity and welfare by reallocating market shares toward high-markup sectors. These gains persist in an extended framework with endogenous firm entry.

Keywords

Preferential credit policy; Sectoral markup heterogeneity; Capital misallocation; Industrial policy; China