The Equilibrium Impact of Credit Frictions: Evidence from Default Risk Using Firm-Level Data

Timothy Besley, Peter John Lambert, Isabelle Michalski-Roland and John Van Reenen
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Timothy Besley: London School of Economics
Peter John Lambert: London School of Economics and University of Warwick and CAGE
Isabelle Michalski-Roland: Bank of England
John Van Reenen: London School of Economics

CAGE Online Working Paper Series from Competitive Advantage in the Global Economy (CAGE)

Abstract: This paper examines the impact of credit frictions arising from firm-level default risk on aggregate economic performance. We build a micro-to-macro model with heterogeneous firms and sector-specific production functions, showing that perceived default risk is a sufficient statistic for credit frictions. Using UK administrative data (2004-2019) matched to S&P risk measures, counterfactual estimates reveal that relaxing frictions raises output by 25% and wages by 23%. Ignoring equilibrium wage adjustments overstates output gains, while fixed-capital misallocation approaches understate them. Most gains reflect aggregate capital accumulation. Credit frictions remain above pre-crisis levels, reshape firm size dynamics, increase misallocation across firms, and dampen productivity growth over time.

Keywords: productivity; default risk; credit frictions; misallocation JEL Classification: D24; E32; L11; O47 (search for similar items in EconPapers)
Date: 2026
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https://warwick.ac.uk/fac/soc/economics/research/c ... tions/wp818.2026.pdf

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Persistent link: https://EconPapers.repec.org/RePEc:cge:wacage:818

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