Misallocation and Financial Frictions: the Role of Long-Term Financing

Marios Karabarbounis and Patrick Macnamara

Review of Economic Dynamics, 2021, vol. 40, 44-63

Abstract: We analyze misallocation of capital in a model where firms face different types of financial constraints. Private firms borrow subject to a collateral constraint while public firms issue long-term bonds subject to default risk. We estimate our model using employment and financial statistics reflecting the overall distribution of firms in conjunction with firm-level data on credit spreads that we target for the set of public firms. In our model, a productive private firm is unable to grow fast if its collateral is limited. But a productive public firm can overcome its financial constraints because it faces low borrowing costs in the debt market, a relationship we also verify in the data. As a result, financial frictions for private firms disrupt investment behavior to a greater degree and generate a larger misallocation of resources relative to financial frictions for public firms. (Copyright: Elsevier)

Keywords: Misallocation; Financial frictions; Long-duration bonds (search for similar items in EconPapers)
JEL-codes: E23 E44 G32 O47 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (7)

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Working Paper: Misallocation and Financial Frictions: the Role of Long-Term Financing (2017)
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DOI: 10.1016/j.red.2020.09.002

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