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Employment Flows with Endogenous Financing Constraints

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Author Info
Shuyun May Li
Abstract

Empirical studies document that resource reallocation across production units plays an important role in accounting for aggregate productivity growth in the U.S. manufacturing. Distortions in financial market could hinder the reallocation process and hencemay adversely affect aggregate productivity growth. This paper studies the quantitative impact of costly external finance on aggregate productivity through resource reallocation across firms with idiosyncratic productivity shocks. A partial equilibrium model calibrated to the U.S. manufacturing data shows that costly external finance causes inefficient output reallocation from high productivity firms to low productivity firms and as a result leads to a 1 percent loss in aggregate TFP.

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Paper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 1045.

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Length: 37 pages
Date of creation: 2008
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Handle: RePEc:mlb:wpaper:1045

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Related research
Keywords: Costly external Finance; Reallocation; Output weighted aggregate productivity;

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    Other versions:
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  16. Diego Restuccia & Richard Rogerson, 2008. "Policy Distortions and Aggregate Productivity with Heterogeneous Plants," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(4), pages 707-720, October. [Downloadable!] (restricted)
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