Financial constraints and economic development: The role of firm productivity investment

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2 Scopus citations

Abstract

This paper demonstrates that accounting for firms' endogenous productivity growth over lifecycle plays an important role in understanding the link between financial and economic development. It incorporates firm productivity investment into a span-of-control model, and compares the effects of firm financing constraints arising in this model to the effects of the same constraints in the model in which firm productivity growth is assumed to be exogenous. It finds that, depending on the severity of firm financing constraints, endogenizing firm productivity growth increases the adverse effects of the constraints on steady state output by 1.5-3 times, both due to a large decrease in average productivity and due to a bigger equilibrium effect on capital used in production.

Original languageEnglish (US)
Pages (from-to)322-342
Number of pages21
JournalReview of Economic Dynamics
Volume51
DOIs
StatePublished - Dec 2023

Keywords

  • Economic development
  • Financing constraints
  • Firm dynamics
  • Innovative investment
  • Misallocation

ASJC Scopus subject areas

  • Economics and Econometrics

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