Crises and Productivity in Good Booms and in Bad Booms

Gary Gorton () and Guillermo Ordonez
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Gary Gorton: Department of Economics, Yale University

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: Credit booms usually precede financial crises. However, some credit booms end in a crisis (bad booms) and other booms do not (good booms). We document that, while all booms start with an increase in the growth of Total Factor Productivity (TFP), such growth falls much faster subsequently for bad booms. We then develop a simple framework to explain this. Firms finance investment opportunities with short-term collateralized debt. If agents do not produce information about the collateral quality, a credit boom develops, accommodating firms with lower quality projects and increasing the incentives of lenders to acquire information about the collateral, eventually triggering a crisis. When the quality of investment opportunities also grow, the credit boom may not end in a crisis because there is a gradual adoption of low quality projects, but those projects are also of better quality, not inducing information about collateral.

Keywords: Financial Crises; Credit booms; Productivity (search for similar items in EconPapers)
JEL-codes: E3 E5 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2014-02-01
New Economics Papers: this item is included in nep-ban, nep-cta, nep-eff, nep-ger and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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