Misallocation and Financial Frictions: The Role of Long-Term Financing

Marios Karabarbounis, Patrick Macnamara

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We analyze misallocation of capital in a model where firms face different types of financial constraints. Private firms borrow subject to a collateral constraint while public firms issue long-term bonds subject to default risk. We estimate our model using employment and financial statistics reflecting the overall distribution of firms in conjunction with firm-level data on credit spreads that we target for the set of public firms. In our model, a productive private firm is unable to grow fast if its collateral is limited. But a productive public firm can overcome its financial constraints because it faces low borrowing costs in the debt market, a relationship we also verify in the data. As a result, financial frictions for private firms disrupt investment behavior to a greater degree and generate a larger misallocation of resources relative to financial frictions for public firms.
Original languageEnglish
Pages (from-to)44-63
Number of pages20
JournalReview of Economic Dynamics
Early online date15 Sep 2020
Publication statusPublished - 1 Apr 2021


  • Financial frictions
  • Long-duration bonds
  • Misallocation


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