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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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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
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  1. Mitchell A. Petersen & Raghuram G. Rajan, 1995. "The Effect of Credit Market Competition on Lending Relationships," The Quarterly Journal of Economics, Oxford University Press, vol. 110(2), pages 407-443.
  2. Robert M. Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
  3. Jonathan Eaton, 1990. "Sovereign Debt, Reputation, and Credit Terms," NBER Working Papers 3424, National Bureau of Economic Research, Inc.
  4. Gertler, Mark & Gilchrist, Simon, 1993. " The Role of Credit Market Imperfections in the Monetary Transmission Mechanism: Arguments and Evidence," Scandinavian Journal of Economics, Wiley Blackwell, vol. 95(1), pages 43-64.
  5. Douglas W. Diamond, 1998. "Reputation Acquisition in Debt Markets," Levine's Working Paper Archive 602, David K. Levine.
  6. Mark Gertler & Simon Gilchrist, 1991. "Monetary Policy, Business Cycles and the Behavior of Small Manufacturing Firms," NBER Working Papers 3892, National Bureau of Economic Research, Inc.
  7. Cole, Harold L & Dow, James & English, William B, 1995. "Default, Settlement, and Signalling: Lending Resumption in a Reputational Model of Sovereign Debt," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(2), pages 365-85, May.
  8. 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.
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