From Firm Productivity Dynamics to Aggregate Efficiency
The author constructs a quantitative framework to evaluate how financial constraints can reduce productivity growth at the firm level and result in lower aggregate productivity. The author considers a model where firms are able to invest in innovat...
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| Format: | Journal Article |
| Language: | English |
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Published by Oxford University Press on behalf of the World Bank
2019
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| Online Access: | http://documents.worldbank.org/curated/en/478111565605990041/From-Firm-Productivity-Dynamics-to-Aggregate-Efficiency http://hdl.handle.net/10986/32231 |
| Summary: | The author constructs a quantitative
framework to evaluate how financial constraints can reduce
productivity growth at the firm level and result in lower
aggregate productivity. The author considers a model where
firms are able to invest in innovation in order to increase
their productivity, or knowledge capital. This investment is
a costly and uncertain enterprise. As the capacity to obtain
external funds is diminished, resources allocated to this
effort will be reduced due to different mechanisms at work.
First, the return of this investment in the case of success
may be diminished by the inability to quickly increase
production capacity if the credit necessary to do so is
scarce (i.e., if entrepreneurs cannot rent the optimal level
of physical capital). Second, financial constraints reduce
profits obtained by entrepreneurs and therefore the amount
of assets they are able to accumulate in every period.
Finally, financially underdeveloped economies will be
characterized by a lower average ability of entrepreneurs.
This is due to the lower equilibrium wage in the economy,
which results in a larger mass of individuals opting to set
up firms. In the margin, these individuals tend to have
lower ability to manage a firm and relatively low prospects
of generating firm productivity growth through innovation. |
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