Firm Entry under Financial Frictions


  • The authors would like to thank Luca Deidda, Alberto Martín, Filippo Taddei, Facundo Piguillem, and two anonymous referees for insightful comments and suggestions. Miguel Casares would like to acknowledge the Ministry of Science and Innovation of Spain (Research Project ECO2011-24304) for its financial support.



How does a general-equilibrium model behave when incorporating competitive firm entry that requires external finance? After conducting a steady-state analysis, we reach three main results. First, the financial constraint has contractionary effects on both equity investment and the labor supply as they are inversely related to the marginal finance cost. Second, the dynamics of firm creation and destruction amplify the impact of changes in either productivity or banking efficiency due to procyclical firm entry. Third, a higher elasticity of substitution (that implies a lower mark-up) cuts the number of firms and makes aggregate output fall.