Debt, Labor Markets and the Creation and Destruction of Firms
39 Pages Posted: 14 Mar 2012
Date Written: February 22, 2012
We analyze the financing decisions of firms that face a labor market with search frictions and examine public policy choices that influence the firms’ financing and liquidation choices. In our model, debt facilitates the process of creative destruction (i.e., the elimination of inefficient firms to facilitate the creation of new firms) but may induce excessive liquidation and unemployment; in particular, during economic downturns. Within this setting we examine the role of monetary policy, which can reduce debt burdens during economy-wide downturns, and tax policy, which can influence the incentives of firms to use debt financing.
Keywords: Debt financing, liquidation, macroeconomic policy, creative destruction
JEL Classification: G33, G39, E58, E62
Suggested Citation: Suggested Citation