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Borrowing Constraints, Markups, and Misallocation

Author

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

Abstract

We document that less constrained firms in an industry have higher markups. This connection between markups and borrowing constraints has important allocative efficiency implications: it lowers the TFP losses from markup dispersion, because looser borrowing constraints help higher markup firms produce more and move their market shares closer to the efficient level. We further document that this relationship is stronger in industries where firms rely more on earnings to borrow, and that markup dispersion is also higher in these industries. We explain all of these patterns using a standard Kimball demand model augmented with borrowing against assets and earnings, and show that the connection between markups and borrowing constraints substantially lowers TFP losses from markup dispersion, especially 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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