Markups, Productivity and the Financial Capability of Firms

Carlo Altomonte (), Domenico Favoino and Tommaso Sonno

No 1755, BAFFI CAREFIN Working Papers from BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy

Abstract: We extend a framework of monopolistically competitive firms heterogeneous in productivity and with endogenous markups (as in Melitz and Ottaviano, 2008) to incorporate the presence of financial frictions. Before producing, firms need to obtain a loan necessary to cover part of production costs, for which they have to pledge collateral in the form of tangible assets. In addition to productivity, firms are also heterogeneous in their financial capability: some firms have access to collateral at lower costs. As a result, financial capability and collateral requirements enter together with productivity in the expression of the equilibrium firm-level markup. At the aggregate level, the model shows that tighter credit constraints in the form of higher collateral requirements mitigate the pro-competitive effect of trade. We validate our theoretical results capitalizing on a representative sample of manufacturing firms surveyed across a subset of European countries during the financial crisis. Guided by theory, we estimate for each firm financial capability, TFP and markups. We then employ those estimates to structurally retrieve from the model a firm-specific measure of collateral requirements (a proxy of credit constraint), and test our main propositions.

Keywords: Credit constraints; heterogeneous rms; markups; international trade (search for similar items in EconPapers)
JEL-codes: F10 F14 G32 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2017
New Economics Papers: this item is included in nep-bec, nep-eff and nep-int
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