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Costly External Finance, Reallocation, and Aggregate Productivity

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  • 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
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    File URL: http://fbe.unimelb.edu.au/__data/assets/pdf_file/0010/802729/1044.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Asymmetric information; Limited liability; Limited commitment; Dynamiccontract; Job reallocation; Stationary competitive equilibrium; Stationary firm distribution.;

    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

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