Specialization, Productivity and Financing Constraints
AbstractWe analyze financial contracting when the specificity of investments is endogenous. Specialization decreases the liquidation value of assets, but it also improves a firm's long term productivity. While the first effect is known to make financing more difficult, we show that the second effect can ease financing constraints by improving an entrepreneur's incentive to pay. An entrepreneur's inability to commit to a given level of specialization introduces inefficiencies and may result in over or under specialization depending on which of the above effects dominates. The tradeoff we identify persists across various forms of specialized investments and generates new predictions. For example, we show that investment in human capital introduces a strategic incentive to specialize since entrepreneurs benefit from their investments even under liquidation.
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Bibliographic InfoPaper provided by University of Pennsylvania, Wharton School, Weiss Center in its series Working Papers with number 10-16.
Date of creation: Apr 2010
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Other versions of this item:
- Robert Marquez & M. Deniz Yavuz, 2013. "Specialization, Productivity, and Financing Constraints," Review of Financial Studies, Society for Financial Studies, vol. 26(11), pages 2961-2984.
- D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
- G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
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