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Financial fragility, patterns of firms' entry and exit and aggregate dynamics

  • Delli Gatti, Domenico
  • Gallegati, Mauro
  • Giulioni, Gianfranco
  • Palestrini, Antonio

Recent literature stresses the drawbacks of the representative agent ap-proach. A growing number of contributions construct model which allows for agents heterogeneity [1, 2] while others claim that aggregate phenomena could be explained by the failure of the law of large numbers rather than by exogenous shocks (see [3] for instance). Another strand of literature stresses the importance of financial factors in determining the behavior of real vari-ables [4, 5, 6]. A few recent papers combine the two concepts. They show that a measure of dispersion of the distribution, other than its average value, matters for the dynamics of the aggregate variable, i.e., one should consider the whole (statistical) distribution of individual variables [7]. Of course, this distribution is heavy in uenced by the "entry-exit" process: bankruptcy eliminates the "worse" tail of the distribution, while the characteristics of the entrants modify it. Some analytical results has been already reached within such a framework [8].The goal of this paper is to verify if and how information availability on the credit market affects the economic dynamics and the distribution of firms with respect to their financial position and size. Moreover, ows into and out of the industry could be affected by credit availability. Our results show that the mean level and the variance of indebtedness of the system varies with the availability of information. In particular, if information is asymmetric the firmsÆ leverage ratio (as proxied by the ratio of corporate debt to capital) is higher and varies very smoothly. Aggregate output is also higher when firms are very leveraged and uctuations are amplified. Since the share of more leveraged firms is procyclical, cyclical downturns are driven by the exit process. We may therefore state that, according to this model, firmsÆ financial distribution movements drive the business cycle. Our results are corroborated by an econometric analysis of the mod

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Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 51 (2003)
Issue (Month): 1 (May)
Pages: 79-97

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Handle: RePEc:eee:jeborg:v:51:y:2003:i:1:p:79-97
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  1. Lucas, Robert E., 1977. "Understanding business cycles," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 5(1), pages 7-29, January.
  2. Stanca, Luca & Gallegati, Mauro, 1999. "The Dynamic Relation between Financial Positions and Investment: Evidence from Company Account Data," Industrial and Corporate Change, Oxford University Press, vol. 8(3), pages 551-72, September.
  3. Greenwald, Bruce C & Stiglitz, Joseph E, 1993. "Financial Market Imperfections and Business Cycles," The Quarterly Journal of Economics, MIT Press, vol. 108(1), pages 77-114, February.
  4. Nobuhiro Kiyotaki & John Moore, 1995. "Credit Cycles," NBER Working Papers 5083, National Bureau of Economic Research, Inc.
  5. Caballero, Ricardo J & Engel, Eduardo M R A & Haltiwanger, John, 1997. "Aggregate Employment Dynamics: Building from Microeconomic Evidence," American Economic Review, American Economic Association, vol. 87(1), pages 115-37, March.
  6. Ricardo J. Caballero & Mohamad L. Hammour, 1991. "The Cleansing Effect of Recessions," NBER Working Papers 3922, National Bureau of Economic Research, Inc.
  7. Klepper, Steven, 1996. "Entry, Exit, Growth, and Innovation over the Product Life Cycle," American Economic Review, American Economic Association, vol. 86(3), pages 562-83, June.
  8. Jonas D.M. Fisher, 1998. "Credit market imperfections and the heterogeneous response of firms to monetary shocks," Working Paper Series, Macroeconomic Issues 96-23, Federal Reserve Bank of Chicago.
  9. Bernanke, B. & Gertler, M. & Gilchrist, S., 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," Working Papers 98-03, C.V. Starr Center for Applied Economics, New York University.
  10. Thomas F. Cooley & Vincenzo Quadrini, 1999. "Financial Markets and Firm Dynamics," Working Papers 99-14, New York University, Leonard N. Stern School of Business, Department of Economics.
  11. Reichlin, Pietro & Siconolfi, Paolo, 1997. "Adverse Selection of Investment Projects and the Business Cycle," CEPR Discussion Papers 1631, C.E.P.R. Discussion Papers.
  12. Richard E. Caves, 1998. "Industrial Organization and New Findings on the Turnover and Mobility of Firms," Journal of Economic Literature, American Economic Association, vol. 36(4), pages 1947-1982, December.
  13. Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1987. "Financing Constraints and Corporate Investment," NBER Working Papers 2387, National Bureau of Economic Research, Inc.
  14. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-50, September.
  15. Williamson, Stephen D., 1996. "Real business cycle research comes of age: A review essay," Journal of Monetary Economics, Elsevier, vol. 38(1), pages 161-170, August.
  16. Sidney Winter & Yuri Kaniovski & Giovanni Dosi, 2003. "A baseline model of industry evolution," Journal of Evolutionary Economics, Springer, vol. 13(4), pages 355-383, October.
  17. Luca Stanca & Domenico Delli Gatti & Mauro Gallegati, 1999. "Financial fragility, heterogeneous agents, and aggregate fluctuations: evidence from a panel of US firms," Applied Financial Economics, Taylor & Francis Journals, vol. 9(1), pages 87-99.
  18. repec:cup:cbooks:9780521465618 is not listed on IDEAS
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