Finance, Managerial Inputs, and Misallocation

Chaoran Chen, Ashique Habib and Xiaodong Zhu

American Economic Review: Insights, 2023, vol. 5, issue 3, 409-26

Abstract: In standard macrofinance models, financial constraints mainly affect small or young firms but not large or old ones due to the self-financing mechanism, and the dispersion of marginal revenue product of capital (MRPK) of a firm cohort is less persistent than in the data. We extend a standard model by allowing firms to hire managers, and large firms hire disproportionately more managers, consistent with data. In our model, financial constraints and the dispersion of MRPK persist, and even large firms are likely to be constrained. The productivity loss from financial frictions is also substantially amplified.

JEL-codes: D24 D25 G32 L25 M10 O16 P31 (search for similar items in EconPapers)
Date: 2023
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Working Paper: Finance, Managerial Inputs, and Misallocation (2022)
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DOI: 10.1257/aeri.20220285

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