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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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    File URL: http://www.economics.unimelb.edu.au/downloads/wp/wp08/1045.pdf
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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
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    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
    Web page: http://fbe.unimelb.edu.au/economics
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    1. Lucia Foster & John C. Haltiwanger & C. J. Krizan, 2001. "Aggregate Productivity Growth. Lessons from Microeconomic Evidence," NBER Chapters, in: New Developments in Productivity Analysis, pages 303-372 National Bureau of Economic Research, Inc.
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    8. Dunne, T. & Roberts, M.J. & Samuelson, L., 1988. "Pattenrs Of Firm Entry And Exit In U.S. Manufacturing Industries," Papers 1-88-2, Pennsylvania State - Department of Economics.
    9. Joao F. Gomes, 2001. "Financing Investment," American Economic Review, American Economic Association, vol. 91(5), pages 1263-1285, December.
    10. Gian Luca Clementi & Hugo A. Hopenhayn, 2006. "A Theory of Financing Constraints and Firm Dynamics," The Quarterly Journal of Economics, Oxford University Press, vol. 121(1), pages 229-265.
    11. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
    12. Russell W. Cooper & John C. Haltiwanger, 2000. "On the Nature of Capital Adjustment Costs," NBER Working Papers 7925, National Bureau of Economic Research, Inc.
    13. 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.
    14. Russell Cooper & Joao Ejarque, 2000. "Exhuming Q: Market Power vs. Capital Market Imperfections," Econometric Society World Congress 2000 Contributed Papers 0528, Econometric Society.
    15. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-50, September.
    16. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
    17. Eric J. Bartelsman & Wayne Gray, 1996. "The NBER Manufacturing Productivity Database," NBER Technical Working Papers 0205, National Bureau of Economic Research, Inc.
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