Debt-Market Friction, Firm-specific Knowledge Capital Accumulation and Macroeconomic Implications

Yicheng Wang

Review of Economic Dynamics, 2017, vol. 26, 19-39

Abstract: This paper studies research and development (R&D) investment and accumulation of firm-specific knowledge capital (i.e., human capital) in the presence of debt market frictions, highlighting the macroeconomic implications. Empirically, R&D investment and knowledge capital are negatively correlated with debt at the firm level, which is in contrast with the positive relationship between physical investment and firm debt. I propose a new model to account for these facts: Firms accumulate firm-specific knowledge capital through R&D investment. However, knowledge capital - different from physical capital - cannot be used as banking collateral. Firms with high R&D investment opportunities rely more on internal finance and less on external debt. The model is quantitatively consistent with empirical facts along several dimensions. Based on the model, I then study the implications of two industrial policies. A practice that encourages using intellectual property as collateral for bank loans has a relatively small effect. I recommend a policy of tax credits for R&D investment. In fact, this policy can increase output by more than 5% and welfare by more than 3% in the long run. (Copyright: Elsevier)

Keywords: Research and development investment; Financial friction; Firm-specific Knowledge Capital; Macroeconomic implications (search for similar items in EconPapers)
JEL-codes: D53 E22 E62 H25 H32 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (7)

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DOI: 10.1016/j.red.2017.02.010

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