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Leverage and productivity

Huiyu Li

Journal of Development Economics, 2022, vol. 154, issue C

Abstract: This paper argues that earnings-based borrowing is important for understanding the extent to which financial frictions lower aggregate productivity (TFP). It builds a general equilibrium model of misallocation due to financial frictions wherein firms borrow by pledging assets and earnings. The model is disciplined to match evidence on aggregate leverage and on the firm-level relationship between leverage and the output-to-capital ratio. Conditional on aggregate leverage, the TFP loss from financial frictions shrinks with the pledgeability of earnings. Similarly, for a given difference in aggregate leverage between two countries, financial frictions may contribute significantly more to TFP differences when the poorer country has lower pledgeability of earnings.

Keywords: Aggregate productivity; Misallocation; Financial frictions; Earnings-based borrowing (search for similar items in EconPapers)
JEL-codes: D24 E23 O16 O47 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:deveco:v:154:y:2022:i:c:s0304387821001188

DOI: 10.1016/j.jdeveco.2021.102752

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