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Borrowing Constraints, Markups, and Misallocation

Author

Listed:
  • Huiyu Li
  • Chen Lian
  • Yueran Ma
  • Emily Martell

Abstract

We document new facts that link firms’ markups to borrowing constraints: (1) less constrained firms within an industry have higher markups, especially in industries where assets are difficult to borrow against and firms rely more on earnings to borrow; (2) markup dispersion is also higher in industries where firms rely more on earnings to borrow. We explain these relationships using a standard Kimball demand model augmented with borrowing against assets and earnings. The key mechanism is a two-way feedback between markups and borrowing constraints. First, less constrained firms charge higher markups, as looser constraints allow them to attain larger market shares. Second, higher markups relax borrowing constraints when firms rely on earnings to borrow, as those with higher markups have higher earnings. This two-way feedback lowers TFP losses from markup dispersion, particularly when firms rely on earnings to borrow.

Suggested Citation

  • Huiyu Li & Chen Lian & Yueran Ma & Emily Martell, 2025. "Borrowing Constraints, Markups, and Misallocation," NBER Working Papers 33960, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:33960
    Note: CF EFG ME PR
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    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production

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