Working Paper Revision

The Cost of Capital and Misallocation in the United States

Abstract: We propose a framework to estimate capital misallocation using credit registry data and apply it to the United States. A dynamic corporate finance model maps loan-level observables into three rates: the lender’s discount rate, the firm’s private cost of capital, and the social cost of capital. We derive a sufficient statistic for misallocation that depends only on the mean and dispersion of the social cost of capital. Applying the framework to U.S. loan originations, we find substantial heterogeneity in the cost of capital but modest aggregate losses in normal times: reallocating capital across firms would raise output by about 0.7%. These losses more than doubled during 2020-2021, rising to 1.6%. The increase was driven primarily by greater dispersion in lender discount rates, reflecting both weaker pass-through from expected losses to loan interest rates and a rise in the cross-sectional variance of expected losses.

JEL Classification: D24; E22; E44; O47; O51;

https://doi.org/10.20955/wp.2025.013

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2026-07-14

Number: 2025-013

Related Works

• Working Paper Revision (2026-07-14) : You are here.
• Working Paper Original (2025-06-10) : The Cost of Capital and Misallocation in the United States