Financial Frictions, Internal Capital Markets, and the Organization of Production

Review of Economic Dynamics, 2015, vol. 18, issue 3, 505-522

Abstract: This paper evaluates the role of internal capital markets in business groups for allocating capital to its most productive use. A quantitative model in which business groups arise endogenously as substitutes for imperfect credit markets explains several stylized facts about establishment size distribution and cross-firm productivity differences. The impact of internal capital markets on economic development is positive: shutting down business conglomeration in the model calibrated to the Canadian economy would lead to a 3 percent reduction in output per capita. These losses are higher in economies with less developed financial markets. (Copyright: Elsevier)

Keywords: Misallocation; Credit constraint; Business conglomeration; TFP (search for similar items in EconPapers)
JEL-codes: E23 E44 L25 O16 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (5)

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Working Paper: Financial Frictions, Internal Capital Markets, and the Organization of Production (2009)
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DOI: 10.1016/j.red.2014.10.001

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