Fewer but Better: Sudden Stops, Firm Entry, and Financial Selection

Sînâ Ateş () and Felipe Saffie
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Sînâ Ateş: Department of Economics, University of Pennsylvania

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: We combine the real business cycle small open economy framework with the endogenous growth literature to study the productivity cost of a sudden stop. In this economy, productivity growth is determined by successful implementation of business ideas, yet the quality of ideas is heterogeneous and good ideas are scarce. A representative financial intermediary screens and selects the most promising ideas, which gives rise to a trade-off between mass (quantity) and composition (quality) in the entrant cohort. Chilean plant-level data from the sudden stop triggered by the Russian sovereign default in 1998 confirms the main mechanism of the model, as firms born during the credit shortage are fewer, but better. A calibrated version of the economy shows the importance of accounting for heterogeneity and selection, as otherwise the permanent loss of output generated by the forgone entrants doubles, which increases the welfare cost by 30%.

Keywords: Financial Selection; Sudden Stop; Endogenous Growth; Firm Entry; Firm Heterogeneity (search for similar items in EconPapers)
JEL-codes: F40 F41 F43 O11 O16 (search for similar items in EconPapers)
Pages: 65 pages
Date: 2014-11-17
New Economics Papers: this item is included in nep-cis, nep-dge, nep-opm and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (23)

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Related works:
Journal Article: Fewer but Better: Sudden Stops, Firm Entry, and Financial Selection (2021)
Working Paper: Fewer but Better: Sudden Stops, Firm Entry, and Financial Selection (2016)
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