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Endogenous Growth, Firm Heterogeneity and the Long-run Impact of Financial Crises

Tom Schmitz

No 609, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: I propose a new endogenous growth model with heterogeneous firms and aggregate shocks. The model shows that firm heterogeneity generates several new amplification and persistence mechanisms for a transitory shock to financing conditions. This shock imposes financing constraints, which force small and young innovating firms (with low retained earnings) to reduce their R&D, and therefore leads to R&D misallocation. Furthermore, it lowers entry and persistently reduces the mass of innovating firms. Thus, even as financing constraints disappear, aggregate R&D and innovation remain persistently depressed, as the remaining large firms can only imperfectly substitute for the R&D of the missing generation of young and small ones. Finally, lower R&D during and after the shock also limits the scope for incremental follow-up innovations. My model's main features are in line with developments in the Spanish manufacturing sector during the 2008-2013 economic and financial crisis.

New Economics Papers: this item is included in nep-bec, nep-cfn, nep-dge, nep-ino and nep-sbm
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed016:609

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