Employment Flows with Endogenous Financing Constraints

Abstract

Empirical studies document that resource reallocation across production units plays an important role in accounting for aggregate productivity growth in the U.S. manufacturing. Distortions in financial market could hinder the reallocation process and hencemay adversely affect aggregate productivity growth. This paper studies the quantitative impact of costly external finance on aggregate productivity through resource reallocation across firms with idiosyncratic productivity shocks. A partial equilibrium model calibrated to the U.S. manufacturing data shows that costly external finance causes inefficient output reallocation from high productivity firms to low productivity firms and as a result leads to a 1 percent loss in aggregate TFP.Costly external Finance; Reallocation; Output weighted aggregate productivity