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Specialization, Productivity and Financing Constraints

Author

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  • Marquez, Robert

    (Boston University)

  • Yavuz, M. Deniz

    (Washington University in St Louis)

Abstract

We analyze financial contracting when the specificity of investments is endogenous. Specialization decreases the liquidation value of assets, but it also improves a firm's long term productivity. While the first effect is known to make financing more difficult, we show that the second effect can ease financing constraints by improving an entrepreneur's incentive to pay. An entrepreneur's inability to commit to a given level of specialization introduces inefficiencies and may result in over or under specialization depending on which of the above effects dominates. The tradeoff we identify persists across various forms of specialized investments and generates new predictions. For example, we show that investment in human capital introduces a strategic incentive to specialize since entrepreneurs benefit from their investments even under liquidation.

Suggested Citation

  • Marquez, Robert & Yavuz, M. Deniz, 2010. "Specialization, Productivity and Financing Constraints," Working Papers 10-16, University of Pennsylvania, Wharton School, Weiss Center.
    • Handle: RePEc:ecl:upafin:10-16
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    File URL: http://fic.wharton.upenn.edu/fic/papers/10/10-16.pdf
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    Cited by:

    1. Umit Ozmel & Deniz Yavuz & Jeffrey J. Reuer & Todd Zenger, 2017. "Network Prominence, Bargaining Power, and the Allocation of Value Capturing Rights in High-Tech Alliance Contracts," Organization Science, INFORMS, vol. 28(5), pages 947-964, October.
    2. Simone Boccaletti & Vittoria Cerasi, 2021. "Liquidation value of productive assets and product differentiation," Working Papers 483, University of Milano-Bicocca, Department of Economics, revised Oct 2021.
    3. Yuting Fan & Ha Nguyen & Rong Qian, 2022. "Collateralized borrowing around the world: Insights from the World Bank Enterprise Surveys," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(2), pages 2420-2437, April.
    4. Dietrich, Diemo & Hauck, Achim, 2014. "Bank capital regulation, loan contracts, and corporate investment," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(2), pages 230-241.
    5. Simone Boccaletti, 2021. "Asset Specificity and the Secondary Market for Productive Assets," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 7(3), pages 411-437, November.

    More about this item

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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