Borrowing Constraints, Markups, and Misallocation

Huiyu Li, Chen Lian, Yueran Ma and Emily Martell

No 33960, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We document that less constrained firms in an industry have higher markups. This connection between markups and borrowing constraints has important allocative efficiency implications: it lowers the TFP losses from markup dispersion, because looser borrowing constraints help higher markup firms produce more and move their market shares closer to the efficient level. We further document that this relationship is stronger in industries where firms rely more on earnings to borrow, and that markup dispersion is also higher in these industries. We explain all of these patterns using a standard Kimball demand model augmented with borrowing against assets and earnings, and show that the connection between markups and borrowing constraints substantially lowers TFP losses from markup dispersion, especially when firms rely on earnings to borrow.

JEL-codes: E22 E23 (search for similar items in EconPapers)
Date: 2025-06
New Economics Papers: this item is included in nep-bec, nep-cfn, nep-com, nep-fdg and nep-ind
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