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How Do Public Investment and Financial Factors Affect Growth in a Debt‐overhang Economy?
Author(s) -
Amable Bruno,
Chatelain JeanBernard
Publication year - 1997
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/1467-9957.00059
Subject(s) - debt overhang , economics , monetary economics , debt , credit rationing , investment (military) , interest rate , productivity , constraint (computer aided design) , crowding out , external debt , finance , macroeconomics , mechanical engineering , politics , political science , law , engineering
In this paper, informational frictions lead to a rationing on the external finance of the firm in proportion to its internal net worth. We study the endogenously generated growth of an economy with heterogeneous firms facing a credit constraint. The productivity of individual firms is affected by the size of public infrastructures subject to congestion which are financed through taxes on profits. Growth will be influenced by the level of the interest rate through interest repayments (a debt‐overhang problem) and by the tax rate. It is shown that there exists a growth‐maximizing financing rule of public investment.