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The Equilibrium Impact of Credit Frictions: Evidence from Default Risk Using Firm-Level Data

Author

Listed:
  • Timothy J. Besley
  • Peter John Lambert
  • Isabelle A. Michalski-Roland
  • John Van Reenen

Abstract

This paper examines the impact of credit frictions arising from firm-level default risk on aggregate economic performance. We build a micro-to-macro model with heterogeneous firms and sector-specific production functions, showing that perceived default risk is a sufficient statistic for credit frictions. Using UK administrative data (2004–2019) matched to S&P risk measures, counterfactual estimates reveal that relaxing frictions raises output by 25% and wages by 23%. Ignoring equilibrium wage adjustments overstates output gains, while fixed-capital misallocation approaches understate them. Most gains reflect aggregate capital accumulation. Credit frictions remain above pre-crisis levels, reshape firm size dynamics, increase misallocation across firms, and dampen productivity growth over time.

Suggested Citation

  • Timothy J. Besley & Peter John Lambert & Isabelle A. Michalski-Roland & John Van Reenen, 2026. "The Equilibrium Impact of Credit Frictions: Evidence from Default Risk Using Firm-Level Data," NBER Working Papers 35552, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:35552
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    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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