“Zombie Congestion, Entry Selection and Resource Misallocation”
Abstract: This paper studies the impact of zombie congestion on the economy. Using firm-level data in China, I find that zombie firms are larger and less productive and receive more subsidies from the government. The congestion of zombie firms affects the productivity distribution of new entrants. The direction of the impact depends on the relative size of zombie incumbents: when zombie incumbents are relatively small (large), a higher zombie rate would increase (decrease) the productivity of entrants. To explain these facts, I develop a model with heterogeneous firms and zombie dynamics. The existence of status-specific subsidy and exit-delaying friction could generate the correlation between the impact of zombie congestion and the relative size of zombie incumbents. A calibrated version of the model is used to quantify the welfare gains from a decline of zombie congestion. Decreasing the exit-delaying friction to match the drop of zombie rate between 1999 and 2005, aggregate output and consumption increase by 1.4 percent and 3.8 percent respectively.