https://macropaperwarehouse.com/authors/poorya-kabir/Poorya KabirHugo -- gohugo.ioen-ushttps://macropaperwarehouse.com/papers/quantifying-the-allocative-efficiency-of-capital-the-role-of-capital-utilization/https://macropaperwarehouse.com/papers/quantifying-the-allocative-efficiency-of-capital-the-role-of-capital-utilization/<p>Standard measures of capital allocative efficiency—based on the dispersion of the average revenue product of capital (ARPK)—are severely biased when capital utilization is endogenous. When utilization is flexible, firms can bypass physical adjustment constraints by varying intensity, so that the correct efficiency measure requires the dispersion of average revenue product of capital services (ARPKS), defined as the log difference between revenue and utilized capital, not of ARPK. Contrary to the standard view that higher ARPK dispersion signals lower allocative efficiency, the paper demonstrates that when efficiency improvements arise from greater utilization flexibility, ARPK dispersion can increase alongside efficiency gains. An application to India&rsquo;s capital market liberalization reform shows that the standard approach (ignoring utilization) predicts allocative efficiency gains of 5.25% (statistically significant), while the corrected approach accounting for utilization finds gains of only 0.04% (not statistically significant).</p>