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Costly External Finance, Reallocation, and Aggregate Productivity

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Author Info
Shuyun May Li
Abstract

This paper develops an industry evolution model to explore the quantitative implications of endogenous financing constraints for job reallocation. In the model firms finance entry costs and per period labor costs with long-term financial contracts signed with banks, which are subject to asymmetric information and limited commitment problems. Financing constraints arise as a feature of the optimal contract. The model generates endogenous firm exit and job reallocation in a stationary industry equilibrium. A quantitative analysis shows that endogenous financing constraints can account for a substantial amount of job reallocation observed in U.S. manufacturing and the observed negative relationship between job reallocation rates and firm size as measured by employment.

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File URL: http://www.economics.unimelb.edu.au/SITE/research/workingpapers/wp08/1044.pdf
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Paper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 1044.

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Length: 47 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:mlb:wpaper:1044

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Postal: Department of Economics, The University of Melbourne, 5th Floor, Economics and Commerce Building, Victoria, 3010, Australia
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Web page: http://www.economics.unimelb.edu.au
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Related research
Keywords: Asymmetric information; Limited liability; Limited commitment; Dynamiccontract; Job reallocation; Stationary competitive equilibrium; Stationary firm distribution.;

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Find related papers by JEL classification:
E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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