Costly External Finance, Reallocation, and Aggregate Productivity

Shuyun May Li

No 1044, Department of Economics - Working Papers Series from The University of Melbourne

Abstract: This paper develops an industry evolution model to explore the quantitative implications of endogenous financing constraints for job reallocation. In the model firms finance entry costs and per period labor costs with long-term financial contracts signed with banks, which are subject to asymmetric information and limited commitment problems. Financing constraints arise as a feature of the optimal contract. The model generates endogenous firm exit and job reallocation in a stationary industry equilibrium. A quantitative analysis shows that endogenous financing constraints can account for a substantial amount of job reallocation observed in U.S. manufacturing and the observed negative relationship between job reallocation rates and firm size as measured by employment.

Keywords: Asymmetric information; Limited liability; Limited commitment; Dynamiccontract; Job reallocation; Stationary competitive equilibrium; Stationary firm distribution. (search for similar items in EconPapers)
JEL-codes: D82 E24 L14 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2008
New Economics Papers: this item is included in nep-cta, nep-dge and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:mlb:wpaper:1044

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