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Financial Frictions at Entry, Average Firm Size, and Productivity

Author

Listed:
  • Bento Pedro

    (Department of Economics, Texas A&M University, 254 West Campus Social Sciences Building, College Station, 77843, TX, USA)

  • Ranasinghe Ashantha

    (Department of Economics, University of Alberta, 8-14 Tory Building, Edmonton, T6G 2H4, AB, Canada)

Abstract

We document cross country-evidence showing financially under-developed economies have lower productivity investment, a smaller employment share of large firms, and smaller average firm size within sectors. We present a tractable model with heterogeneous entrepreneurs that face financial constraints limiting investment at entry. The model can be solved analytically, making clear predictions for the impact of constraints on outcomes of interest consistent with the evidence we document. The calibrated model can account for about one fifth of the variance in observed average firm size and TFP across countries, all substantial relative to the literature.

Suggested Citation

  • Bento Pedro & Ranasinghe Ashantha, 2025. "Financial Frictions at Entry, Average Firm Size, and Productivity," The B.E. Journal of Macroeconomics, De Gruyter, vol. 25(1), pages 81-120.
    • Handle: RePEc:bpj:bejmac:v:25:y:2025:i:1:p:81-120:n:1006
    DOI: 10.1515/bejm-2024-0051
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    More about this item

    Keywords

    financial development; firm size; investment; aggregate productivity;
    All these keywords.

    JEL classification:

    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

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