Efficiency Of Capital Allocation

Economic development is always constrained by limited resources. How to use resources efficiently is the core issue of economic study. Generally, we can evaluate the efficiency by the state of social welfare. All the resources in a society can be regarded as being of two types: capital and non-capital resources. Capital is that part of resources which are devoted to acquiring more resources. If all of our resources are employed in the form of capital, the optimum state of social welfare can't be achieved. Agreed by many, the state of social welfare is depending on the welfare state of every person involved, and the state of an individual is depending on numerous parameters such as aggregate consumption, distribution, law, natural environment, science and technology, state security, education, ethnics. Some of them can be improved by using resources as capital, and some can't. If there is no trade-off, improving the efficiency of capital and noncapital both can enhance the state of social welfare. However, if there is a trade-off, how to use resources is determined by their marginal products of social welfare.This thesis is intended to explore an important aspect of the efficiency of capital: allocation efficiency of capital. Capital allocation is the distribution of capital among different channels. If we relocate capital from channels of low marginal product to high marginal one, the average return of a certain amount of capital will be increased. This is so called optimization of the usage of capital or the improvement of allocation efficiency of capital. It is easy to see the improvement of allocation efficiency is conducive to the improvement of efficiency of capital.The loss of capital allocation efficiency is referring to the difference between the state of current state and the optimal state of capital allocation. To continue the study of allocation efficiency, the first task is to determine the optimal state of capital allocation. Responding to this question, the author proposes a concept: the best Pareto optimum. From its definition, it is easy to see that the best Pareto state of capital allocation is the optimal state of capital allocation.Allocation cost is an essential concept of this dissertation, which is proposed by the author. This concept is crucial to the discussion of this work. Allocation costs can be divided into static and dynamic allocation costs. Allocation costs also can be divided into unexpected fluctuation costs, allocation risk costs, and regular allocation costs. Regular allocation costs are composed of static and dynamic regular allocation costs. Dynamic allocation costs are all of dynamic regular allocation costs. Regular allocation costs have three continuants: entry costs, transition costs, and exit costs.The author verified that when a society is free of externality and allocation cost, the forces of market will drive capital allocation to the optimal state. By applying Coase theorem, the author further proved that if property rights are unambiguously defined, and allocation cost equals zero, the forces of market will drive capital allocation to the optimal state. Hence, for the purpose of augmenting the efficiency of capital allocation, we ought to clearly define property right and reduce allocation cost.The author also proved that as long as allocation cost is zero, the market forces tend to equate the return rates of every investment. When studying the efficiency loss of allocation, the author breaks the aggregate loss into several parts. By this means, we can understand the causes of these losses. First, if all the return rates are the same, the loss surely comes from the ambiguity of property right. Other losses that come from allocation costs can be further broken down. The main research results are as following:Suppose that when property right is fully clear and allocation cost is null, the allocation efficiency is U1; suppose that when allocation is null, the allocation efficiency is U2; suppose that the current allocation efficiency is U3. The loss between U1 and U2 stems from the unclearness of property right. It can be proved that U2 is an equilibrium state of capital allocation. The feature of this state is that the return rates of any investment are equal in every minute. The loss between U2 and U3 evolves from the existence of allocation costs.Suppose that when unexpected fluctuation cost is null, allocation risk cost is null, the capital allocation state is U21; suppose that when unexpected fluctuation cost is null, the state is U22; suppose that when regular dynamic allocation cost is null, the state is U23. U21 represents an equilibrium state, in which the periodical return rates of any investment are the same. The difference between U2 and U21 comes from the existence of regular allocation costs. U22 also stands for an equilibrium state, in which the risk debated periodical return rate of a certain investment equals any other investment. The difference between U21 and U22 is dictated by allocation risk costs. U23 is still an equilibrium state, in which the discrepancy of risk debated periodical return rates between any investments must be less than regular static allocation cost. The difference between U22 and U23 is determined by regular static allocation cost. If temporary equilibrium is not counted as an equilibrium state, U3 is not necessarily in an equilibrium state. U3 tends to converge to U23. The efficiency loss during this process is traceable to dynamic allocation costs.Finally, the author carries out an empirical study on industry to examine the allocation efficiency and allocation costs. This work uses rate of return on equity (ROE) as an indicator of return rate of an investment, and uses coefficient of variation to measure the differences among investments. The variation of allocation efficiency is explained through the relationship between new investment and ROE.In this dissertation, the author defines several concepts, which is hoped to be the foundations for further research. These concepts are: allocation, allocation cost, best Pareto optimum, potential allocation surplus. He introduces a few analyzing methods such as connection examination method and wealth accrue curve method. The author analyzes certain issues using new perspectives, for example he analyzes costs from the angle of state transformations. In this study, the author extends the permanent income hypothesis and Coase theorem.