CREDIT MARKET RISK AND SMALL FIRM SHARE: A NUMERICAL GENERAL EQUILIBRIUM ANALYSIS

Rajeev Dhawan ()

No 344, Computing in Economics and Finance 2000 from Society for Computational Economics

Abstract: Small firms outperform large firms in terms of profitability, productivity and growth. Recent technological, market and consumer taste changes have all been conducive to small firms' emergence but still their share of the national income has fallen significantly in the last two decades. This papers investigates the reason for this decline in a general equilibrium framework given the fact that small firms have difficulty accessing the credit market for external funds. Credit market features are calibrated based on evidence from firm level and commercial bank loan loss data. Steady state calculations indicate that a 1% decline in small firm share of GNP leads to a welfare cost that is 0.61% of output, or $46 billion of real GNP at current levels. This suggests that the declining trend in small firm share of the GNP is a matter of concern and government policies designed to alleviate financing constraints faced by small firms are justified in principle.

Date: 2000-07-05
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