IDEAS home Printed from https://ideas.repec.org/p/mlb/wpaper/1044.html

Costly External Finance, Reallocation, and Aggregate Productivity

Author

Listed:
  • Shuyun May Li

Abstract

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.

Suggested Citation

  • Shuyun May Li, 2008. "Costly External Finance, Reallocation, and Aggregate Productivity," Department of Economics - Working Papers Series 1044, The University of Melbourne.
    • Handle: RePEc:mlb:wpaper:1044
    as

    Download full text from publisher

    File URL: http://fbe.unimelb.edu.au/__data/assets/pdf_file/0010/802729/1044.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Stephen E. Spear & Sanjay Srivastava, 1987. "On Repeated Moral Hazard with Discounting," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 54(4), pages 599-617.
    2. Hans-Werner Sinn, 2002. "Risktaking, Limited Liability, and the Competition of Bank Regulators," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 59(3), pages 305-329, August.
    3. Cheng Wang, 2000. "Renegotiation-Proof Dynamic Contracts with Private Information," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(3), pages 396-422, July.
    4. Krueger, Dirk & Uhlig, Harald, 2006. "Competitive risk sharing contracts with one-sided commitment," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1661-1691, October.
    5. Steven J. Davis & John C. Haltiwanger & Scott Schuh, 1998. "Job Creation and Destruction," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262540932, December.
    6. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
    7. Evans, David S, 1987. "The Relationship between Firm Growth, Size, and Age: Estimates for 100 Manufacturing Industries," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 567-581, June.
    8. Thomas Cooley & Ramon Marimon & Vincenzo Quadrini, 2004. "Aggregate Consequences of Limited Contract Enforceability," Journal of Political Economy, University of Chicago Press, vol. 112(4), pages 817-847, August.
    9. Christian Gollier & Pierre-François Koehl & Jean-Charles Rochet, 1996. "Risk-Taking Behavior with Limited Liability and Risk Aversion," Center for Financial Institutions Working Papers 96-13, Wharton School Center for Financial Institutions, University of Pennsylvania.
    10. Quadrini, Vincenzo, 2004. "Investment and liquidation in renegotiation-proof contracts with moral hazard," Journal of Monetary Economics, Elsevier, vol. 51(4), pages 713-751, May.
    11. Mark Gertler, 1992. "Financial Capacity and Output Fluctuations in an Economy with Multi-Period Financial Relationships," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 59(3), pages 455-472.
    12. Repullo, Rafael, 2004. "Capital requirements, market power, and risk-taking in banking," Journal of Financial Intermediation, Elsevier, vol. 13(2), pages 156-182, April.
    13. Timothy Dunne & Mark J. Roberts & Larry Samuelson, 1989. "The Growth and Failure of U. S. Manufacturing Plants," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 104(4), pages 671-698.
    14. Hopenhayn, Hugo & Rogerson, Richard, 1993. "Job Turnover and Policy Evaluation: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, vol. 101(5), pages 915-938, October.
    15. Gian Luca Clementi & Hugo A. Hopenhayn, 2006. "A Theory of Financing Constraints and Firm Dynamics," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(1), pages 229-265.
    16. S. Rao Aiyagari & Stephen D. Williamson, 1999. "Credit in a Random Matching Model with Private Information," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 36-64, January.
    17. Gilchrist, Simon & Himmelberg, Charles P., 1995. "Evidence on the role of cash flow for investment," Journal of Monetary Economics, Elsevier, vol. 36(3), pages 541-572, December.
    18. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-670, May.
    19. Thomas F. Cooley & Vincenzo Quadrini, 2001. "Financial Markets and Firm Dynamics," American Economic Review, American Economic Association, vol. 91(5), pages 1286-1310, December.
    20. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-1150, September.
    21. Phelan Christopher, 1995. "Repeated Moral Hazard and One-Sided Commitment," Journal of Economic Theory, Elsevier, vol. 66(2), pages 488-506, August.
    22. Carlstrom, Charles T & Fuerst, Timothy S, 1997. "Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis," American Economic Review, American Economic Association, vol. 87(5), pages 893-910, December.
    23. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
    24. 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).
    25. Andrew Atkeson & Robert E. Lucas, 1992. "On Efficient Distribution With Private Information," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 59(3), pages 427-453.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Shuyun May Li, 2009. "Optimal Lending Contracts with Asymmetric Information and Two-sided Limited Commitment or Impatient Entrepreneur," Department of Economics - Working Papers Series 1065, The University of Melbourne.
    2. Li, Shuyun May, 2013. "Optimal lending contracts with long run borrowing constraints," Journal of Economic Dynamics and Control, Elsevier, vol. 37(5), pages 964-983.
    3. Shuyun May Li, 2009. "Optimal Lending Contracts with Long Run Borrowing Constraints," Department of Economics - Working Papers Series 1084, The University of Melbourne.
    4. Gian Luca Clementi & Hugo Hopenhayn, "undated". "A Theory of Financing Constraints and Firm Dynamics," GSIA Working Papers 2002-E9, Carnegie Mellon University, Tepper School of Business.
    5. Chiara Coluzzi & Annalisa Ferrando & Carmen Martínez-Carrascal, 2009. "Financing obstacles and growth: An analysis for euro area non-financial corporations," Working Papers 0836, Banco de España.
    6. Quadrini, Vincenzo, 2004. "Investment and liquidation in renegotiation-proof contracts with moral hazard," Journal of Monetary Economics, Elsevier, vol. 51(4), pages 713-751, May.
    7. Thomas F. Cooley & Vincenzo Quadrini, 2001. "Financial Markets and Firm Dynamics," American Economic Review, American Economic Association, vol. 91(5), pages 1286-1310, December.
    8. Shuyun May Li, 2008. "Employment Flows with Endogenous Financing Constraints," Department of Economics - Working Papers Series 1045, The University of Melbourne.
    9. Bayraktar, Nihal, 2014. "Fixed investment/fundamental sensitivities under financial constraints," Journal of Economics and Business, Elsevier, vol. 75(C), pages 25-59.
    10. Sakai, Koji & Uesugi, Iichiro & Watanabe, Tsutomu, 2010. "Firm age and the evolution of borrowing costs: Evidence from Japanese small firms," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1970-1981, August.
    11. Rahaman, Mohammad M., 2011. "Access to financing and firm growth," Journal of Banking & Finance, Elsevier, vol. 35(3), pages 709-723, March.
    12. Alexander Monge-Naranjo, 2008. "Limited Commitment, Firm Dynamics and Aggregate Fluctuations," 2008 Meeting Papers 964, Society for Economic Dynamics.
    13. Roman Fossati, 2011. "Outsourcing versus Vertical Integration: A Dynamic Model of Industry Equilibrium," 2011 Meeting Papers 1421, Society for Economic Dynamics.
    14. Stephane Verani, 2018. "Aggregate Consequences of Dynamic Credit Relationships," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 29, pages 44-67, July.
    15. Ushijima, Tatsuo, 2005. "Internal capital market and the growth and survival of Japanese plants in the United States," Journal of the Japanese and International Economies, Elsevier, vol. 19(3), pages 366-385, September.
    16. Sangeeta Pratap & Silvio Rendon, 2003. "Firm Investment in Imperfect Capital Markets: A Structural Estimation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(3), pages 513-545, July.
    17. Esteban Rossi-Hansberg & Mark L. J. Wright, 2007. "Establishment Size Dynamics in the Aggregate Economy," American Economic Review, American Economic Association, vol. 97(5), pages 1639-1666, December.
    18. Huynh, Kim P. & Petrunia, Robert J., 2010. "Age effects, leverage and firm growth," Journal of Economic Dynamics and Control, Elsevier, vol. 34(5), pages 1003-1013, May.
    19. Toshihiko Mukoyama & Yoonsoo Lee, 2008. "Entry, Exit, and Plant-level Dynamics over the Business Cycle," 2008 Meeting Papers 454, Society for Economic Dynamics.
    20. Cesar Tamayo, 2017. "Bankruptcy Choice with Endogenous Financial Constraints," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 26, pages 225-242, October.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:mlb:wpaper:1044. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Dandapani Lokanathan (email available below). General contact details of provider: https://edirc.repec.org/data/demelau.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.