Costly External Finance, Reallocation, and Aggregate Productivity
Journal of Productivity Analysis, 35(3) 2011, pp. 181-195
15 Pages Posted: 26 Oct 2010 Last revised: 8 Jan 2014
Date Written: October 25, 2010
Empirical studies document that resource reallocation across production units plays an important role in accounting for aggregate productivity growth in the US manufacturing. Financial market frictions could distort the reallocation process and hence may hinder 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 US 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.
Keywords: Costly External Finance, Reallocation, Output-Weighted Aggregate Productivity
JEL Classification: E22, D24, G10
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