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Small firms, borrowing constraints, and reputation

  • Martinelli, Cesar

This paper presents a simple model relating firm age with firm size and access to credit markets. Lending to new firms is risky because lenders have had no time to accumulate observations about them. As a result, interest rates are high and loans are small for entering firms. As firms need credit to operate, credit markets impose a limit on the scale of operation of new firms. Reputation building by the firms allows markets to overcome these difficulties over time. Large firms face lower interest rates than small firms, and credit markets fluctuations are shown to have different effects on firms of different size.

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File URL: http://www.sciencedirect.com/science/article/pii/S0167-2681(97)00023-1
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Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 33 (1997)
Issue (Month): 1 (May)
Pages: 91-105

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Handle: RePEc:eee:jeborg:v:33:y:1997:i:1:p:91-105
Contact details of provider: Web page: http://www.elsevier.com/locate/jebo

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  1. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  2. Harold L. Cole & James Dow & William B. English, 1994. "Default, settlement, and signalling: lending resumption in a reputational model of sovereign debt," Staff Report 180, Federal Reserve Bank of Minneapolis.
  3. Diamond, Douglas W, 1989. "Reputation Acquisition in Debt Markets," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 828-62, August.
  4. Mark Gertler & Simon Gilchrist, 1993. "The role of credit market imperfections in the monetary transmission mechanism: arguments and evidence," Finance and Economics Discussion Series 93-5, Board of Governors of the Federal Reserve System (U.S.).
  5. Mark Gertler & Simon Gilchrist, 1993. "Monetary policy, business cycles and the behavior of small manufacturing firms," Finance and Economics Discussion Series 93-4, Board of Governors of the Federal Reserve System (U.S.).
  6. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
  7. Jonathan Eaton, 1990. "Sovereign Debt, Reputation, and Credit Terms," NBER Working Papers 3424, National Bureau of Economic Research, Inc.
  8. Mitchell A. Petersen & Raghuram G. Rajan, 1994. "The Effect of Credit Market Competition on Lending Relationships," NBER Working Papers 4921, National Bureau of Economic Research, Inc.
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