Factor Demands, Effective Discount Rates, and Liquidity Constraints in the Retail Trade Firm

Eunkyung Kwon

Economic Inquiry, 2000, vol. 38, issue 2, 304-19

Abstract: This is a firm-level empirical study of the impact of credit market frictions on firm factor demands. It extends previous work in two ways, it studies the impact of liquidity constraints on both fixed investment and employment and examines data on retail firms. Using the Euler equation approach, it finds strong evidence for the impact of financial constraints on factor demands. Estimated relationships in turn induce striking countercyclical movements in effective discount rates of firms with limited access to credit. The article concludes that the results found in previous work regarding excess sensitivities of investment to liquidity are indeed due to liquidity constraints. Copyright 2000 by Oxford University Press.

Date: 2000
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