Working Paper: NBER ID: w19296
Authors: Marco Bassetto; Marco Cagetti; Mariacristina De Nardi
Abstract: We study the effects of credit shocks in a model with heterogeneous entrepreneurs, financing constraints, and a realistic firm size distribution. As entrepreneurial firms can grow only slowly and rely heavily on retained earnings to expand the size of their business in this set-up, we show that, by reducing entrepreneurial firm size and earnings, negative shocks have a very persistent effect on real activity. In determining the speed of recovery from an adverse economic shock, the most important factor is the extent to which the shock erodes entrepreneurial wealth.
Keywords: credit shocks; entrepreneurial firms; financial intermediation; economic recovery
JEL Codes: E21; E23; E6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| credit shocks (G21) | reduced firm size (L25) |
| reduced firm size (L25) | persistent decline in real activity (E32) |
| credit shocks (G21) | slower recovery rates (G33) |
| reduced firm size (L25) | slower recovery rates (G33) |
| credit intermediation costs (G21) | borrowing constraints (F34) |
| borrowing constraints (F34) | reduced entrepreneurial activity (L26) |
| government policies (H59) | exacerbation of negative effects of credit shocks on entrepreneurial profits (E44) |