Credit Market Imperfections, Selection, and the Distribution of Within-industry Productivity

Konferenzbeitrag

Recent empirical research relates lower aggregate total factor productivity to more dispersed productivity levels within narrowly defined industries. This paper shows that specificity in creditor-borrower relationships will cause adverse selection in line with this evidence. It demonstrates how more severe credit market imperfections will allow less productive firms to enter and will simultaneously prevent more productive firms from entry. To this end, I introduce endogenous credit search frictions in the spirit of Diamond (1990) in a heterogenous firm model à la Hopenhayn (1992) and Melitz (2003). In a perfect credit market, financiers can cherry-pick the most profitable firms. With credit search frictions, financiers also invest in less productive firms because this makes them better off than continuing to search for a more profitable investment opportunity. Consequently, productivity dispersion increases and average productivity falls. I use the framework to assess the impact of product market competition, more efficient credit matching, and changes in the relative bargaining power of firms and banks on productivity.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Beiträge zur Jahrestagung des Vereins für Socialpolitik 2010: Ökonomie der Familie - Session: Innovation and Productivity ; No. E16-V1

Classification and Topics

• Classification: Wirtschaft ; Production, Pricing, and Market Structure; Size Distribution of Firms ; Industrial Organization and Macroeconomics: Industrial Structure and Structural Change; Industrial Price Indices ; Comparative Studies of Countries
• Subject: Credit Search ; Heterogenous Firms ; Productivity

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Bauer, Christian
• Event: Veröffentlichung
• (who): Verein für Socialpolitik
• (where): Frankfurt a. M.
• (when): 2010

Further information

• Handle: http://hdl.handle.net/10419/37415
• Last update: 10.03.2025, 11:43 AM CET