Employment Flows with Endogenous Financing Constraints

Abstract:     
This paper embeds a long-term financial contract subject to asymmetric information into an industry equilibrium model to explore the quantitative implications of endogenous financing constraints for job reallocation. In the model, firms sign upon entry long-term contracts with banks that finance their entry and per period labor costs. Firms may exit due to liquidation by banks or exogenous exit shocks. The model has a unique stationary equilibrium with turnover of jobs and firms. A quantitative exercise shows that endogenous financing constraints account for a significant amount of job reallocation observed in U.S. manufacturing and the observed negative relationship between gross job flow rates and firm size as measured by employment.

Keywords: asymmetric information, job reallocation, long-term financial contract, stationary

JEL Classification: E24, D82, L14

Accepted Paper Series