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Firm Entry under Financial Frictions
Author(s) -
Casares Miguel,
Poutineau JeanChristophe
Publication year - 2013
Publication title -
review of development economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.531
H-Index - 50
eISSN - 1467-9361
pISSN - 1363-6669
DOI - 10.1111/rode.12033
Subject(s) - economics , elasticity of substitution , general equilibrium theory , monetary economics , equity (law) , productivity , constraint (computer aided design) , investment (military) , business cycle , marginal cost , free entry , finance , microeconomics , macroeconomics , production (economics) , mechanical engineering , politics , political science , law , engineering
How does a general‐equilibrium model behave when incorporating competitive firm entry that requires external finance? After conducting a steady‐state analysis, we reach three main results. First, the financial constraint has contractionary effects on both equity investment and the labor supply as they are inversely related to the marginal finance cost. Second, the dynamics of firm creation and destruction amplify the impact of changes in either productivity or banking efficiency due to procyclical firm entry. Third, a higher elasticity of substitution (that implies a lower mark‐up) cuts the number of firms and makes aggregate output fall.