Monday 06 December 2021 16:00 - 17:30

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About this event

We build a growth model with heterogeneous firms that endogenizes productivity growth, firm selection, and borrowing under financial frictions. In particular, facing an incomplete financial market with endogenous (firm-specific) interest rate spreads and borrowing constraints, firms choose productivity enhancing investments and debt with an option to default. We calibrate our model with micro data on US firms, finding that financial frictions can be very pervasive. The model suggests that frictions strongly select against high-growth firms and that certain heterogeneities make the economy more sensitive to financial frictions. We find that investment subsidies can be effective in alleviating the bite of financial frictions. We also study the repercussions of crises stemming from the non-financial sector. We find that bankruptcies may serve a critical role in reallocating resources (technology, funds, and labor) away from low-growth firms that were barely surviving during normal times. We also find that short-term stabilization policies may couch the economy during the crisis but may also decimate the long-run boon to productivity by diminishing positive selection.

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This series is part of the CEP's Labour Markets programme.