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Costly External Finance, Reallocation, and Aggregate Productivity

  • Shuyun May Li
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    This paper develops an industry evolution model to explore the quantitative implications of endogenous financing constraints for job reallocation. In the model firms finance entry costs and per period labor costs with long-term financial contracts signed with banks, which are subject to asymmetric information and limited commitment problems. Financing constraints arise as a feature of the optimal contract. The model generates endogenous firm exit and job reallocation in a stationary industry equilibrium. A quantitative analysis shows that endogenous financing constraints can account for a substantial amount of job reallocation observed in U.S. manufacturing and the observed negative relationship between job reallocation rates and firm size as measured by employment.

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    Paper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 1044.

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    Length: 47 pages
    Date of creation: 2008
    Date of revision:
    Handle: RePEc:mlb:wpaper:1044
    Contact details of provider: Postal: Department of Economics, The University of Melbourne, 4th Floor, FBE Building, Level 4, 111 Barry Street. Victoria, 3010, Australia
    Phone: +61 3 8344 5355
    Fax: +61 3 8344 6899
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    19. Albuquerque, R. & Hopenhayn, H.A., 1997. "Optimal Dynamic Lending Contracts with Imperfect Enforceability," RCER Working Papers 439, University of Rochester - Center for Economic Research (RCER).
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