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Employment Flows with Endogenous Financing Constraints

  • Shuyun May Li
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    Empirical studies document that resource reallocation across production units plays an important role in accounting for aggregate productivity growth in the U.S. manufacturing. Distortions in financial market could hinder the reallocation process and hencemay adversely affect aggregate productivity growth. This paper studies the quantitative impact of costly external finance on aggregate productivity through resource reallocation across firms with idiosyncratic productivity shocks. A partial equilibrium model calibrated to the U.S. manufacturing data shows that costly external finance causes inefficient output reallocation from high productivity firms to low productivity firms and as a result leads to a 1 percent loss in aggregate TFP.

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    Paper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 1045.

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    Length: 37 pages
    Date of creation: 2008
    Date of revision:
    Handle: RePEc:mlb:wpaper:1045
    Contact details of provider: Postal: Department of Economics, The University of Melbourne, 4th Floor, FBE Building, Level 4, 111 Barry Street. Victoria, 3010, Australia
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    Web page: http://www.economics.unimelb.edu.au
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    1. Russell W. Cooper & John C. Haltiwanger, 2000. "On the Nature of Capital Adjustment Costs," NBER Working Papers 7925, National Bureau of Economic Research, Inc.
    2. Gian Luca Clementi & Hugo Hopenhagn, 2004. "A Theory of Financing Constraints and Firm Dynamics," Working Papers 04-25, New York University, Leonard N. Stern School of Business, Department of Economics.
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    5. 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.
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    7. Lucia Foster & John Haltiwanger & C.J. Krizan, 1998. "Aggregate Productivity Growth: Lessons from Microeconomic Evidence," NBER Working Papers 6803, National Bureau of Economic Research, Inc.
    8. Diego Restuccia & Richard Rogerson, 2008. "Policy Distortions and Aggregate Productivity with Heterogeneous Plants," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(4), pages 707-720, October.
    9. Eric J. Bartelsman & Phoebus J. Dhrymes, 1994. "Productivity dynamics: U.S. manufacturing plants, 1972-1986," Finance and Economics Discussion Series 94-1, Board of Governors of the Federal Reserve System (U.S.).
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    11. 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.
    12. Russell Cooper & Joao Ejarque, 2000. "Exhuming Q: Market Power vs. Capital Market Imperfections," Econometric Society World Congress 2000 Contributed Papers 0528, Econometric Society.
    13. Whited, Toni M, 1992. " Debt, Liquidity Constraints, and Corporate Investment: Evidence from Panel Data," Journal of Finance, American Finance Association, vol. 47(4), pages 1425-60, September.
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    16. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-50, September.
    17. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
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