A Model of Capital Structure Under Labor Market Search

69 Pages Posted: 20 Sep 2017 Last revised: 16 Feb 2019

See all articles by Ping Liu

Ping Liu

Krannert School of Management, Purdue University

Date Written: January 1, 2019

Abstract

This paper develops a competitive search equilibrium model of capital structure and labor outcomes. In the model, employers design capital structures and compete for workers subject to idiosyncratic productivity shocks and labor search frictions. The capital structure policy reflects the trade-off between the "strategic benefit" of debt in wage bargaining and the cost of debt in labor hiring. The model generates rich comparative static implications regarding the impacts of productivity, credit and labor market factors on leverage and labor outcomes. A calibration yields a large wage dispersion and a highly elastic labor market tightness with respect to productivity.

Keywords: Capital Structure, Labor Market Search, Competitive Search Equilibrium

JEL Classification: G30, J2, J3

Suggested Citation

Liu, Ping, A Model of Capital Structure Under Labor Market Search (January 1, 2019). Available at SSRN: https://ssrn.com/abstract=3038469 or http://dx.doi.org/10.2139/ssrn.3038469

Ping Liu (Contact Author)

Krannert School of Management, Purdue University ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States
7654944691 (Phone)

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