Labour reallocation and total factor productivity losses from financial constraints in the Buera-Shin model

ABSTRACT

The previous study by Buera and Shin develop a dynamic general equilibrium model where financial constraints affect resource allocation across heterogeneous agents and therefore total factor productivity (TFP). The present article raises the issue that concerns their calibration approach. While the model allows for endogenous entry and exit of producers, its simulated moments on labour reallocation along the intensive and extensive margins are not consistent with the relevant data. Then a modified version of the model that is consistent with the data is proposed. The modified model predicts that TFP losses from financial constraints are smaller. Based on the findings, this article argues that statistics on labour reallocation along the intensive and extensive margins should be moments which help to discipline the model with endogenous entry and exit.

KEYWORDS:

• Total factor productivity
• financial constraints
• labour reallocation
• entry and exit of producers

JEL CLASSIFICATION:

• E22
• E44
• G32
• O16

Acknowledgments

Special thanks to Neil Wallace for the advice and insight that he offered in many discussions. Saroj Bhattarai and James Tybout also provided helpful comments and suggestions. This article also benefited from comments by the anonymous reviewer, participants in the 2014 Asian Meeting of the Econometric Society in Taipei, Korea University, and Sogang University.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ TFP’s are normalized by their respective values in perfect capital markets.