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Lending terms and aggregate productivity

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  • Figueroa, Nicolás
  • Leukhina, Oksana

Abstract

Several empirical studies suggest that lending terms are eased in expansions and tightened in recessions, thereby influencing the mix of financed entrepreneurs. We study a model of adverse selection in competitive financial markets and show that lending terms deteriorate with the aggregate state under two general conditions. If exogenous increments to entrepreneurs׳ productivity raise returns to investment and/or tighten the credit line needed to screen out a given entrepreneur type, competition results in contracts with less screening. Two endogenous effects on productivity emerge. Production scales grow closer to optimal, but lower productivity entrepreneurs enter the mix of producers. The positive (negative) effect dominates at low (high) aggregate states.

Suggested Citation

  • Figueroa, Nicolás & Leukhina, Oksana, 2015. "Lending terms and aggregate productivity," Journal of Economic Dynamics and Control, Elsevier, vol. 59(C), pages 1-21.
    • Handle: RePEc:eee:dyncon:v:59:y:2015:i:c:p:1-21
    DOI: 10.1016/j.jedc.2015.07.001
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    Cited by:

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    3. Dong, Feng & Xu, Zhiwei, 2020. "Cycles of credit expansion and misallocation: The Good, the Bad and the Ugly," Journal of Economic Theory, Elsevier, vol. 186(C).

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    More about this item

    Keywords

    Lending terms; Credit market frictions; Competitive financial markets; Adverse selection; Productivity;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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