firm dynamics and financial development abstract using comprehensive firm level datasets this paper studies the impact of cross country variation in financial market development on firms financing choices and growth in less financially developed economies small firms grow faster and have lower leverage than large firms as financial development improves the growth difference between small and large firms shrinks while the leverage difference rises the paper then develops a quantitative model where financial frictions drive firm growth and debt financing through the availability of credit and default risk the model explains the observed cross country variations in firm size leverage and growth in response to changes in financial frictions

why doesn t technology flow from rich to poor countries what determines the technology that a country adopts while there could be many factors the e ciency of the country s nancial system may play a signi cant role to address this question a dynamic contract model is embedded into a general equilibrium setting with competitive intermediation the ability of an intermediary to monitor and control the cash ows of a rm plays an important role in a rm s decision to adopt a technology can such a theory help to explain the

incentive effects of the u s welfare system a review the author would like to acknowledge support for prior work on this topic from the u s department of health and human services and helpful comments from three anonymous referees rebecca blank howard chernick john fitzgerald irwin garfinkel peter gottschalk edward gramlich david greenberg judith gueron james heckman v joseph hotz robert hutchens michael keane frank levy larry mead michael murray robert plotnick anuradha rangarajan philip robins howard rolston jeffrey smith and daniel weinberg all opinions and errors are those of the author alone

dynamic financial constraints distinguishing mechanism design from exogenously incomplete regimes we formulate and solve a range of dynamic models of constrained credit insurance that allow for moral hazard and limited commitment we compare them to full insurance and exogenously incomplete financial regimes autarky saving only borrowing and lending in a single asset we develop computational methods based on mechanism design linear programming and maximum likelihood to estimate compare and statistically test these alternative dynamic models with financial information constraints our methods can use both cross sectional and panel data and allow for measurement error and unobserved heterogeneity we estimate the models using data on thai households running small businesses from two separate samples we find that in the rural sample the exogenously incomplete saving only and borrowing regimes provide the best fit using data on consumption business assets investment and income family and other networks help consumption smoothing there as in a moral hazard constrained regime in contrast in urban areas we find mechanism design financial information regimes that are decidedly less constrained with the moral hazard model fitting best combined business and consumption data we perform numerous robustness checks in both the thai data and in monte carlo simulations and compare our maximum likelihood criterion with results from other metrics and data not used in the estimation a prototypical counterfactual policy evaluation exercise using the estimation results is also featured

breakthroughs deadlines and self reported progress contracting for multistage projects we study the optimal incentive schemes for multistage projects staged financing pervasive in both venture capital and research grants arises as a feature of the optimal contract the nature of progress plays an important role when progress is tangible incentives are provided through a series of deadlines and a reward scheme that decreases over time early progress in one stage gives the agent more time and funding to complete the next one when progress is intangible unverifiable progress reports are used despite the fact that the information in the report has no social value the optimal contract involves a soft deadline wherein the principal guarantees funding up to a certain date if the agent reports progress at that date then the principal gives him a relatively short deadline to complete the project if not then a probationary phase begins in which the project is terminated at a constant rate until progress is reported we explore the implications for welfare and optimal project design

food stamps and food insecurity what can be learned in the presence of nonclassical measurement error policymakers have been puzzled to observe that food stamp households appear more likely to be food insecure than observationally similar eligible nonparticipating households we reexamine this issue allowing for nonclassical reporting errors in food stamp participation and food insecurity extending the literature on partially identified parameters we introduce a nonparametric framework that makes transparent what can be known about conditional probabilities when a binary outcome and conditioning variable are both subject to nonclassical measurement error we find that the food insecurity paradox hinges on assumptions about the data that are not supported by the previous food stamp participation literature

demand learning and firm dynamics evidence from exporters abstract this paper provides direct evidence that learning about demand is an important driver of firms dynamics we present a model of bayesian learning in which firms are uncertain about idiosyncratic demand in each market and update their beliefs as noisy information arrives firms update their beliefs to a given demand shock more the younger they are we test and empirically confirm this prediction using the structure of the model together with exporter level data to identify demand shocks and the firms beliefs about future demand consistent with theory we also find the learning process to be weakened in more uncertain environments

optimal dynamic capital budgeting i study optimal design of a dynamic capital allocation process in an organization in which the division manager with empire building preferences privately observes the arrival and properties of investment projects and headquarters can audit projects at a cost under certain conditions a budgeting mechanism with threshold separation of financing is optimal headquarters 1 allocate a spending account to the manager and replenish it over time 2 set a threshold such that projects below it are financed from the account while projects above are financed fully by headquarters upon an audit further analysis studies when co financing of projects is optimal and how the size of the account depends on past performance of projects

viewpoint further results on measuring the well being of the poor using income and consumption we evaluate the relative merits of income and consumption based measures of well being our results provide evidence that consumption better captures well being for those with few resources the bottom deciles of expenditures exceed those of income suggesting under reporting of income the under reporting rate for government transfers is high and rising overall non response is more severe in u s income data than in expenditure data furthermore a consumption data set requires fewer observations than an income data set to obtain the same level of precision for typical estimates finally very low consumption is more strongly related to other bad outcomes than very low income on evalue les merites relatifs des mesures de bien etre fondees sur le revenu et la consommation les resultats montrent que la consommation mesure mieux le bien etre de ceux qui ont peu de ressources les deciles au bas de la distribution des depenses depassent les deciles de la distribution des revenus ce qui suggere qu il y aurait des revenus non rapportes le taux de sous declaration des transferts gouvernementaux est eleve et croissant le taux global de non reponses est plus important aux etats unis pour les revenus que pour les depenses de plus les bases de donnees sur la consommation requierent moins d observations que celles sur le revenu pour obtenir le meme degre de precision des evaluations typiques finalement une tres basse consommation est plus fortement co reliee a d autres mauvaises conditions qu un tres bas niveau de revenu

large firm dynamics and the business cycle do large firm dynamics drive the business cycle we answer this question by developing a quantitative theory of aggregate fluctuations caused by firm level disturbances alone we show that a standard heterogeneous firm dynamics setup already contains in it a theory of the business cycle without appealing to aggregate shocks we offer an analytical characterization of the law of motion of the aggregate state in this class of models the firm size distribution and show that aggregate output and productivity dynamics display i persistence ii volatility and iii time varying second moments we explore the key role of moments of the firm size distribution and in particular the role of large firm dynamics in shaping aggregate fluctuations theoretically quantitatively and in the data

the relationship between firm growth size and age estimates for 100 manufacturing industries this study uses a sample of all firms operating in 100 manufacturing industries to examine some aspects of firm dynamics it finds that firm growth the variability of firm growth and the probability that a firm will fail decrease with firm age it also finds that firm growth decreases at a diminishing rate with firm size even after controlling for the exit of slow growing firms from the sample gibrat s law therefore fails although the severity of the failure decreases with firm size copyright 1987 by blackwell publishing ltd

cross sectoral variation in the volatility of plant level idiosyncratic shocks we estimate the volatility of plant level idiosyncratic shocks in u s manufacturing we measure the variation in revenue total factor productivity not explained by either industry or economy wide factors or by establishments characteristics we find that idiosyncratic shocks are much larger than aggregate shocks accounting for about 80 of the overall uncertainty faced by plants plants in the most volatile sector are subject to about six times as much idiosyncratic uncertainty as plants in the least volatile we provide evidence suggesting that idiosyncratic risk is higher in industries where the extent of creative destruction is likely to be greater

decomposition of new venture growth into firm age survey period and vintage effects firm data are accumulated on a yearly basis in view of the linear relationship of firm age foundation year survey year the fluctuations of firm data classified by age and period cannot be decomposed into age period and cohort foundation year effects three decomposition methods are briefly reviewed and applied to japanese data on new ventures founded since 1995 regarding sales and employment growth the age effect is the largest with a downward trend and the cohort effect is negligible regarding labour productivity the age effect indicates upward movements and the cohort effect is negligible the reason of the negligible cohort effect is discussed

a structural model of multiple welfare program participation and labor supply work on estimating the labor supply effects of high marginal tax rates in welfare programs has been hindered by the difficulty of estimating the effects of participation in multiple welfare programs simultaneously the authors solve this problem by applying methods of simulation estimation to a model of labor supply and multiple program participation the results show asymmetric wage and tax rate effects with fairly large wage elasticities of labor supply but very inelastic responses to moderate changes in cumulative marginal tax rates implying that high welfare tax rates do not necessarily induce major reductions in work effort copyright 1998 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

partial identification methods for evaluating food assistance programs a case study of the causal impact of snap on food insecurity we illustrate how partial identification methods can be used to provide credible inferences on the causal impacts of food assistance programs focusing on the impact that the supplemental nutrition assistance program snap formerly known as the food stamp program has on food insecurity among households with children recent research applies these methods to address two key issues confounding identification missing counterfactuals and nonrandomly misclassified treatment status in this paper we illustrate and extend the recent literature by using data from the survey of income and program participation sipp to study the robustness of prior conclusions the sipp confers important advantages the detailed information about income and eligibility allows us to apply a modified discontinuity design to sharpen inferences and the panel nature allows us to reduce uncertainty about true participation status we find that snap reduces the prevalence of food insecurity in households with children by at least six percentage points

teardowns and land values in the chicago metropolitan area an empirical model of residential housing demolitions and the redevelopment process in the chicago metropolitan area supports the theoretical prediction that the sales price of teardown property is approximately equal to its land value we control for sample selection bias associated with non random demolition permit applications using a probit model that accounts for misclassification of the dependent variable the probit models provide statistically significant evidence of misclassification and suggest that prime teardown candidates are small older homes near public transportation and traditional village centers

capital flows under moral hazard abstract i analyze a model with moral hazard and limited enforcement in a small open economy i find that when state contingent contracting is allowed adding the moral hazard friction improves the model s predictions along several dimensions first it justifies why non contingent debt is an optimal way to finance an emerging economy second it explains the limited consumption risk sharing and high volatile and counter cyclical interest rates third it generates realistic crisis like dynamics in which capital inflows are brought to a halt and interest rates sky rocket the model also has a strong internal propagation mechanism limited enforcement friction alone or together with moral hazard has nearly no effect on the model s performance i also construct a simple empirical test to distinguish between the two frictions and it favors moral hazard over limited enforcement friction

dynamic security design convergence to continuous time and asset pricing implications an entrepreneur with limited liability needs to finance an infinite horizon investment project an agency problem arises because she can divert operating cash flows before reporting them to the financiers we first study the optimal contract in discrete time this contract can be implemented by cash reserves debt and equity the latter is split between the financiers and the entrepreneur and pays dividends when retained earnings reach a threshold to provide appropriate incentives to the entrepreneur the firm is downsized when it runs short of cash we then study the continuous time limit of the model we prove the convergence of the discrete time value functions and optimal contracts our analysis yields rich implications for the dynamics of security prices stock prices follow a diusion reflected at the dividend barrier and absorbed at zero their volatility as well as the leverage ratio of the firm increase after bad performance stock prices and book tomarket ratios are in a non monotonic relationship a more severe agency problem entails lower price earning ratios and firm liquidity and higher default risk

stochastic house appreciation and optimal mortgage lending w e characterize the optimal mortgage contract in a continuous time setting with stochastic growth in house price and income costly foreclosure and a risky borrower who requires incentives to repay his debt we show that many features of subprime loans can be consistent with properties of the optimal contract and that when house prices decline mortgage modification can create value for borrowers and lenders our model provides a number of empirical predictions that relate the features of mortgage contracts originated in a housing boom and the extent of their modification in a slump to location and borrowers characteristics jel g20 g21 g33

chinese investment in the eu renewable energy sector motives synergies and policy implications abstract this paper addresses three questions how have trade and investment in wind and solar sectors evolved between the eu and china in recent years is there a link between rising trade conflicts and trade and investment trends and what wider motivations and synergies can be identified in chinese investments in the eu s re sector to address these questions we analyze trade and investment data as well as qualitative data including information from media and company reports large increases in trade and investment were followed by rapid falls since 2012 13 trade tensions have not led to increases in investment rather the inverse we find that chinese investment in these two sectors is very concentrated in germany the key motivation for investment is market seeking although r d is also important especially for wind most investments are greenfield a preference that has persisted over time our qualitative analysis of several key acquisitions indicates that technology integration and the consolidation of capacities across the supply chain were key motivations in most of the cases studied we conclude with some policy orientations

a macroeconomic approach to corporate capital structure abstract the cross sectional distribution of corporate capital structure and its macroeconomic implications are underexplored research areas this paper embeds a dynamic trade off theory of firm financing into a general equilibrium model with firm dynamics i find that the stationary equilibrium replicates fairly well the distribution of leverage as well as the relationship between leverage size and profitability the counterfactual experiment points out relatively small effects of tax benefits on corporate capital structure it also implies that the effects of the default cost on macroeconomic variables are almost negligible under endogenous capital structure choice

efficient sovereign default in this article i show that the key aspects of sovereign debt crises can be rationalized as part of the efficient risk sharing arrangement between a sovereign borrower and foreign lenders in a production economy with informational and commitment frictions the constrained efficient allocation involves ex post inefficient outcomes that resemble sovereign default episodes in the data and can be implemented with non contingent defaultable bonds and active maturity management defaults and periods of temporary exclusion from international credit markets happen along the equilibrium path and are essential to supporting the efficient allocation furthermore during debt crises the maturity composition of debt shifts towards short term debt and the term premium inverts as in the data

optimal mortgage design this article studies optimal mortgage design in a continuous time setting with volatile and privately observable income costly foreclosure and a stochastic market interest rate we show that the features of the optimal mortgage are consistent with an option adjustable rate mortgage option arm under the optimal contract the borrower is given discretion of how much to repay until his balance reaches a certain limit the default rates and interest rate payment on the mortgage correlate positively with the market interest rate gains from using the optimal contract relative to simpler mortgages are the biggest for those who face more income variability buy pricey houses given their income level or make little or no down payment our model thus may help to explain a high concentration of option arms among riskier borrowers jel g20 g21 g33

optimal annuitization with stochastic mortality and correlated medical costs the conventional wisdom since yaari 1965 is that households without a bequest motive should fully annuitize their investments numerous frictions do not break this sharp result we modify the yaari framework by allowing a household s mortality risk itself to be stochastic due to health shocks a lifetime annuity still helps to hedge longevity risk but the annuity s remaining present value is correlated with medical costs such as those for nursing home care thereby reducing annuity demand even without ad hoc liquidity constraints we find that most households should not hold a positive level of annuities and many should hold negative amounts jel d14 d82 g23 i12 j14 j26

measuring the well being of the poor using income and consumption we examine the relative merits of consumption and income as measures of the material well being of the poor consumption offers several advantages over income because consumption is a more direct measure of well being than income and is less subject to underreporting bias measurement problems with income are problematic for analyses of changes in well being of the poor because the biases appear to have changed over time and are correlated with government policies on the other hand income is often easier to report and is available for much larger samples providing greater power to test hypotheses we begin by considering the conceptual and pragmatic reasons why consumption might be better or worse than income then we employ several empirical strategies to examine the quality of income and consumption data first we compare income and consumption reports for those with few resources as well as their assets and liabilities to examine measurement errors and under reporting second we examine other evidence on the internal consistency of reports of low income or consumption third we compare how well micro data in standard datasets weight up to match aggregates for classes of income and consumption that are especially important for low resource families fourth we validate income and consumption measures by comparing them to other measures of hardship or material well being although the evidence tends to favor consumption measures our analyses suggest that both measures should be used to assess the material well being of the poor

financial frictions investment and tobin s q we develop a model of investment with financial constraints and use it to investigate the relation between investment and tobin s a firm is financed partly by insiders who control its assets and partly by outside investors when their wealth is scarce insiders earn a rate of return higher than the market rate of return i e they receive a quasi rent on invested capital this rent is priced into the value of the firm so tobin s is driven by two forces changes in the value of invested capital and changes in the value of the insiders future rents per unit of capital this weakens the correlation between and investment relative to the frictionless benchmark we present a calibrated version of the model which due to this effect generates realistic correlations between investment a nd cashflow

liquidity default liquidity management and smooth dividends policy abstractour article models liquidity financing constraints with the real options framework by conducting a comprehensive investigation of the effects of shocks to liquidity constraints on the firm s optimal investment financing and dividend policies our model highlights the importance of liquidity management and extends the liquidity management approach to hedge liquidity default risk we find that being concerned about liquidity default risk will significantly change a firm s behaviours including those related to investment and the optimal capital structure a firm that is concerned about its liquidity default risk will become more cautious it will choose to delay investment and have higher leverage when internal liquidity is very low but choose earlier investment and lower leverage when liquidity is high enough the dividends policy can alleviate risks from both the external market and internal project volatility and provides an alternative explanation for the smooth dividends policy puzzle comm

selection and firm survival evidence from the shipbuilding industry 1825 1914 several theories of firm performance can explain the well known observation that survival is positively related to age however a more mundane explanation selection bias driven by variations in firm quality may also underlie the phenomenon this paper employs a 90 year plant level panel data set on the u s iron and steel shipbuilding industry of the nineteenth and early twentieth centuries to discriminate between the explanations the shipbuilding industry exhibits the usual joint dependence of survival on age and size but this dependence is eliminated after controlling for heterogeneity by using preentry experience as a proxy for firm quality the evidence points to a dominant role for selection bias in creating the age dependence of survival at the same time preentry experience is found to have a large and extremely persistent effect on survival and this finding is inconsistent with standard explanations for the role of preentry experience on firm performance

large risks limited liability and dynamic moral hazard we study a continuous time principal agent model in which a risk neutral agent with limited liability must exert unobservable effort to reduce the likelihood of large but relatively infrequent losses firm size can be decreased at no cost or increased subject to adjustment costs in the optimal contract investment takes place only if a long enough period of time elapses with no losses occurring then if good performance continues the agent is paid as soon as a loss occurs payments to the agent are suspended and so is investment if further losses occur accumulated bad performance leads to downsizing we derive explicit formulae for the dynamics of firm size and its asymptotic growth rate and we provide conditions under which firm size eventually goes to zero or grows without bounds

a theory of financing constraints and firm dynamics there is widespread evidence supporting the conjecture that borrowing constraints have important implications for firm growth and survival in this paper we model a multiperiod borrowing lending relationship with asymmetric information we show that borrowing constraints emerge as a feature of the optimal long term lending contract and that such constraints relax as the value of the borrower s claim to future cash flows increases we also show that the optimal contract has interesting implications for firm dynamics in agreement with the empirical evidence as age and size increase mean and variance of growth decrease and firm survival increases

bite me abc s shark tank as a path to entrepreneurship business pitch competitions provide early stage finance and mentoring for entrepreneurs in this paper we analyze data from the most public high stakes pitch competition in the usa abc s shark tank we construct a dataset comprising all entrepreneurs firms that have aired between august 2009 and may 2016 our findings 1 funding on the show seems to relax an internal financial constraint rather than signal the quality of the venture to potential outside investors 2 to the extent that the latter is occurring there is plausible evidence that the signaling effect works in an unexpected direction for women entrepreneurs it may crowd out attention from potential investors 3 while it is fairly clear that this pitch competition is associated with longer run existence of firms it has no significant impacts on innovation 4 there are no consistent differential impacts on racial ethnic minorities these findings complement the literature on the impact of pitch competitions and early access to finance

the price effects of monetary shocks in a network economy abstract empirical evidence shows monetary shocks have two temporary effects on the distribution of prices one the dispersion of cross section of prices increases in response to monetary shocks two some prices change in the wrong direction some prices decrease in response to positive monetary shocks and increase in response to negative monetary shocks we present a model that generates the two effects of monetary shocks on the distribution of prices as an out of equilibrium phenomena firms are related to each other through a production network monetary shocks change the working capital of a subset of firms and percolate to other firms through buyer seller linkages price dispersion increases because the percolation of a monetary shock through the production network causes prices to differentially deviate from their steady state values some prices change in the wrong direction because a shift in one firm s demand causes a shift in another firm s supply and vice versa thereby generating complicated chains of bi directional price changes monetary shocks can significantly disturb relative prices even when all prices are fully flexible

on efficient distribution with private information this paper is a study of the dynamics of the efficient distribution of consumption in an exchange economy with many consumers each of whom is subject to private idiosyncratic taste shocks we propose a recursive method for finding feasible allocations that are incentivecompatible and that are pareto optimal within this set the method is applied to several parametric examples we find that in an efficient allocation the degree of inequality continually increases with a diminishing fraction of the population receiving an increasing fraction of the resources we discuss the extent to which these allocations can be decentralized via market arrangements this paper is a study of the dynamics of the efficient distribution of consumption in an exchange economy with private information the economy we study has a constant endowment flow of a single non storable consumption good which is to be allocated each period among a large number of consumers each period these consumers experience unpredictable idiosyncratic privately observed taste shocks affecting their marginal utility of current consumption efficiency dictates that more resources be allocated to those consumers who in any given period have a high marginal utility of current consumption

financial capacity and output fluctuations in an economy with multi period financial relationships this paper motivates a financial propagation mechanism in the context of an intertemporal production economy with asymmetric information and with borrowers and lenders who enter multi period financial relationships a key feature is that aggregate output and borrowers financial capacity the maximum overhang of past debt they may feasibly carry are determined jointly much in the spirit of gurley and shaw 1955 expectations of future economic conditions govern financial capacity which in turn may constrain current production especially in bad times a small but persistent shift in aggregate conditions may have a large impact on financial capacity making the framework capable of motivating large endogenous fluctuations in financial constraints understanding how small disturbances can induce large output fluctuations is an on going quest in macroeconomics this paper develops a simple framework in which shifts in aggregate economic fundamentals are amplified through their impact on financial conditions a distinguishing feature is that output and borrowers financial capacity the maximum overhang of past debt they may feasibly carry are determined jointly much in the spirit of gurley and shaw 1955 expectations of future economic conditions govern financial capacity and financial capacity may constrain current production especially in bad times a number of recent papers have resurrected the view that financial factors may play a part in propagating business fluctuations the underlying theories exploit the idea that with asymmetric information between borrowers and lenders agency costs may drive the price of uncollateralized external funds above the price of internal funds in this kind of setting a borrower s financial position is a key determinant of the terms of credit she faces in the aggregate swings in borrower balance sheets over the cycle amplify fluctuations in investment and output essentially by inducing counter cyclical movements in the required premium for external finance this simple mechanism is broadly consistent with informal descriptions of how financial and real variables interacted in the great depression bernanke 1983 and in the postwar business cycles eckstein and sinai 1986 in addition numerous recent panel data studies beginning with fazzari hubbard and peterson 1988 support the notion of a financial investment accelerator mechanism

r d and credit rationing in smes we study the effects of credit rationing on research and development r d investment using survey and accounting data on a large representative sample of manufacturing small and medium sized enterprises smes our econometric model accounts for the endogeneity of our credit rationing indicator and employs an innovative theory based identification strategy we find that credit rationing has a significantly negative effect on both the probability to set up r d activities and on the level of r d spending conditioned on the r d decision but the overall estimated reduction in r d spending is largely to be associated with the first effect jel g21 d82 032 c35 i introduction long run economic growth and welfare resides on the production of new knowledge and its implementation into new or improved products or processes for this reason identification evaluation and correction of the detrimental effects of potential underinvestment in research and development r d activities have a prominent place in the policy agendas of all industrialized countries this is particularly the case in europe where since the start of the recent economic crisis the policy debate has been focused on the role of capital market imperfections as they increase the cost of r d when firms do not have sufficient internal funds to finance it the credit crunch that is the lack of availability or reduction in supply of credit to businesses from traditional financial institutions is said to reduce firms investment in innovative activities and growth prospects however despite its theoretical appeal and in contrast with the proven sensitivity of fixed capital investment to financing constraints evidence on the susceptibility of r d investment to financial frictions and in particular to credit rationing is still mixed and inconclusive three explanations have been put forward for the lack of robust evidence first it is claimed that the variety in the results reflects the contrast between theoretical explanations based on asymmetric information arguments suggesting a sensitivity of r d to financing constraints potentially higher than that of ordinary investment and the characteristics of r d as a long term investment with high adjustment costs suggesting rather the opposite 1 second existing evidence is based almost exclusively on the sensitivity of firm level r d spending to the availability of internal finance typically measured through cash flow which is however known to be problematic in its ability to proxy for financing constraints kaplan and zingales 1997 2000 third recent contributions have stressed the difficulty in identifying the role of financing constraint using standard investment models when firms have access to multiple channels for raising external financial resources and managing buffer stocks of liquidity brown martinsson and petersen 2011 in this study we use firm level data on r d investment and credit constraints to measure the detrimental effect of credit rationing on r d investment dealing with all the above specified issues first we claim that the ambiguity originated by information problems versus the nature of r d as a long term investment might be resolved if we distinguish between the probability of r d investment the r d participation decision and the size of r d investment once the decision to invest has been taken the amount of r d spending decision we therefore study the effect of credit rationing on the decision to do r d and on the amount of r d investment our hypothesis is that credit rationing displays a stronger effect on the first decision compared with the latter while this expectation might seem obvious to our knowledge econometric analyses on the topic have not yet addressed or proven the differential impact of credit rationing on the participation and amount decisions respectively

a theory of multiperiod debt structure we develop a theory of multiperiod debt structure a simple trade off between the termination threat required to make debt repayments incentive compatible and the desire to avoid early liquidation determines the number of repayments their timing and amounts as firms increase their borrowing they add periodic risky repayments from the back of the maturity structure with the time between repayments increasing in cash flow risk cash flow growth or a significant risk free cash flow component limits the number of risky repayments firms with a significant risk free cash flow component choose dispersed maturity profiles with smaller relatively safe repayments every period rather than riskier periodic repayments

optimal long term financial contracting we develop an agency model of financial contracting we derive long term debt a line of credit and equity as optimal securities capturing the debt coupon and maturity the interest rate and limits on the credit line inside versus outside equity dividend policy and capital structure dynamics the optimal debt equity ratio is history dependent but debt and credit line terms are independent of the amount financed and in some cases the severity of the agency problem in our model the agent can divert cash flows we also consider settings in which the agent undertakes hidden effort or can control cash flow risk

optimal lending contracts and firm dynamics we develop a general model of lending in the presence of endogenous borrowing constraints borrowing constraints arise because borrowers face limited liability and debt repayment cannot be perfectly enforced in the model the dynamics of debt are closely linked with the dynamics of borrowing constraints in fact borrowing constraints must satisfy a dynamic consistency requirement the value of outstanding debt restricts current access to short term capital but is itself determined by future access to credit this dynamic consistency is not guaranteed in models of exogenous borrowing constraints where the ability to raise short term capital is limited by some prespecified function of debt we characterize the optimal default free contract which minimizes borrowing constraints at all histories and derive implications for firm growth survival leverage and debt maturity the model is qualitatively consistent with stylized facts on the growth and survival of firms comparative statics with respect to technology and default constraints are derived borrowing constraints are an important determinant of firm growth and survival 1 such constraints may arise in connection to the financing of investment opportunities faced by firms or temporary liquidity needs such as those required to survive a recession this paper develops a theory of endogenous borrowing constraints and studies its implications for firm dynamics in our model debt is constrained by the firm s limited liability and option to default a lending contract specifies an initial loan size future financing and a repayment schedule the choice of these variables in turn determines future growth the firm s future borrowing capacity and its ability and willingness to repay hence borrowing constraints and firm dynamics are jointly determined we study this dynamic design problem our model builds on thomas and worral s 1994 model of foreign direct investment at time zero a risk neutral borrower firm or entrepreneur has a project which requires a fixed initial set up cost every period the project yields revenues that increase with the amount of 1 there is considerable evidence suggesting that financing constraints are important determinants of firm dynamics gertler and gilchrist 1994 argue that liquidity constraints may explain why small manufacturing firms respond more to a tightening of monetary policy than do larger manufacturing firms perez quiros and timmermann 2000 show that in recessions smaller firms are more sensitive to the worsening of credit market conditions as measured by higher interest rates and default premia evans and jovanovic 1989 show that the liquidity constraints are essential in the decision to become an entrepreneur fazzari hubbard and petersen 1988 among others view financial constraints as an explanation for the dynamic behaviour of aggregate investment and cabral and mata 1996 are able to fit reasonably well the size distribution of portuguese manufacturing firms by estimating a simple model of financing constraints for surveys see hubbard 1998 and stein 2003

outside opportunities and termination abstract we study a dynamic principal agent relationship where a stochastic outside opportunity offer arises each period for the risk averse agent termination is costly but it allows the agent to pursue the available outside opportunity and the principal to return to an external market to hire a new agent the principal acts strategically with respect to the agent s outside offers and we show that it is optimal to terminate the current relationship if and only if the agent s outside offer is above a cutoff level the optimal contract generates both voluntary and involuntary terminations severance compensation arises endogenously and we show that it may be paid only in involuntary terminations conditional on termination the size of the optimal severance compensation depends positively on the agent s current compensation but negatively on his outside offer the optimal contract dictates an inverted u relationship between compensation and the probability of termination

financial determinants of firm dynamics evidence from a european panel i use a panel of large european firms for the period 1999 2007 to study scale dependence in firm dynamics i find that scale dependence is much more pronounced when focusing on within firm rather than between firm variation and that scale dependence is a decreasing function of financial development

intertemporal distortions in the second best we consider a very general class of public nance problems that encompasses ramsey models of optimal taxation as well as economies with limited commitment private information and political economy frictions we identify a su cient condition to rule out permanent intertemporal distortions at the optimum if there exists an admissible allocation that converges to the rst best steady state then all intertemporal distortions are temporary in the second best we analyze a series of applications to illustrate the signi cance of this result

cross sectoral variation in the volatility of plant level idiosyncratic shocks the volatility of plant level idiosyncratic shocks we estimate the volatility of plant level idiosyncratic shocks in u s manufacturing we measure the variation in revenue total factor productivity not explained by either industry or economy wide factors or by establishments characteristics we find that idiosyncratic shocks are much larger than aggregate shocks accounting for about 80 of the overall uncertainty faced by plants plants in the most volatile sector are subject to about six times as much idiosyncratic uncertainty as plants in the least volatile we provide evidence suggesting that idiosyncratic risk is higher in industries where the extent of creative destruction is likely to be greater

financial constraints and firm dynamics this study analyzes the effect of financial constraints fcs on firm dynamics we measure fcs with an official credit rating which captures availability and cost of external resources we find that fcs undermine average firm growth induce anti correlation in growth patterns and reduce the dependence of growth volatility on size fcs are also associated with higher volatility and asymmetries in growth shock distributions preventing young fast growing firms especially from seizing attractive growth opportunities and further deteriorating the growth prospects of already slow growing firms particularly if old the sub diffusive nature of the growth process of constrained firms is compatible with the distinctive properties of their size distribution

estimation with response error and nonresponse error in survey data originates from failure to contact the sample and from false answers to verifiable questions these errors may be systematic and associated with uncooperative or unreliable respondents zabel modeled attrition in the survey of income and program participation and found systematic demographic and design effects bollinger and david modeled response error and identified correlations to income per capita in this analysis we link missing interviews in a panel and response error through a trivariate probit analysis robustness of the correlation between attrition and response error is examined by comparing variants of the model the joint model of response error and attrition becomes the first stage of a pseudolikelihood estimate of a model of food stamp participation the model is significantly different from naive probit on the survey data

how sensitive is investment to cash flow when financing is frictionless i analyze the sensitivity of a rm s investment to its own cash ow in the benchmarkcase where nancing is frictionless this sensitivity has been proposed as a measure of nancing constraints in earlier studies i nd that the investment cash ow sensitivities that obtain in the frictionless benchmarkare very similar both in magnitude and in patterns they exhibit to those observed in the data in particular the sensitivity is higher for rms with high growth rates and low dividend payout ratios tobin s q is shown to be a more noisy measure of near term investment plans for these rms does a high sensitivityof a rm s investment to its own cash ow indicate that the rm is nancially constrained a large body of research starting with fazzari hubbard and petersen 1988 hereafter fhp suggests that rms facing nancing constraints should exhibit high investment cash ow sensitivities re ecting the wedge between the costs of external and internal funds empirical ndings seem to give support to this hypothesis since rms classi ed as constrained on a priori criteria such as size dividend payout or leverage do have higher cash ow sensitivities even after controlling for their investment opportunities by conditioning on tobin s q however the reliability of these results critically depends on whether q is a proper control for the investment opportunity set if q performs worse for certain classes of rms higher sensitivities may obtain for these rms simply because cash ow re ects information about investment opportunities this critique is not new in his discussion of fhp poterba 1988 was the rst to point out that measurement error in q may cloud the empirical results similar concerns have been raised in subsequent studies as well while the qualitative point is well known its quantitative impact on the investment cash ow sensitivity has not been analyzed can the linkbetween cash ow and the investment opportunity set account for the observed magnitudes of the sensitivity or are these magnitudes too large to be explained without nancing frictions