Equilibrium Shirking, Access to Credit and Endogenous TFP Fluctuations

Manoj Atolia (), Tor Einarsson and Milton Marquis

Economica, 2015, vol. 82, issue 327, 486-507

Abstract: type="main" xml:id="ecca12122-abs-0001">

This paper develops a model in which idea-rich, cash-poor entrepreneurs undertake risky investment projects that are subject to future liquidity needs and shirking due to moral hazard. The model suggests that the strength of the entrepreneur's incentive to shirk is countercyclical and that endogenous shirking adds volatility to the economy by increasing the persistence and volatility of TFP. This increase in persistence and volatility is driven by the variation in the number of successfully completed projects, compounded by the effect of the incentive to shirk on access to credit; changes in factor employment play only a minor role.

Date: 2015
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