Financial contracting and misreporting with limited enforcement, firm financing and growth

Figures & data

Figure 1. Impulse responses from a positive technology shock

Source: Author’s calculations

Figure 2. Impulse responses from a positive technology shock

Source: Author’s calculations

Figure 3. Relationship between expected leverage, expected risk premium, investment and limited enforcement in response to productivity shocks

Source: Author’s calculations

Figure 4. Impulse responses from a negative shock to net worth

Source: Author’s calculations

Figure 5. Impulse responses from a negative shock to net worth

Source: Author’s calculations

Figure 6. Relationship between expected leverage, expected risk premium, investment and limited enforcement in response to net worth shocks

Source: Author’s calculations

Table 1. Calibration

Description	Parameter	Value
Contract Enforcement	$\zeta$	(0,1)
Verification Cost	$\mu$	0.15
Discount Factor	$\beta$	0.99
Labour Supply Disutility	$\nu$	2.52
Productivity Parameter	$A$	1.00
Persistence in Aggregate Technology Shock	${\rho }_A$	0.95
Depreciation Rate of Capital	$\delta$	$2\mathrm{\%}$
Share of Capital in Production	${\alpha }_K$	$36\mathrm{\%}$
Share of Entrepreneurial Labour in Production	${\alpha }_e$	$0.01\mathrm{\%}$
Share of Household Labour in Production	${\alpha }_H$	$63.99\mathrm{\%}$
Additional Discount Rate for Entrepreneurs	$\gamma$	$91\mathrm{\%}$
Fraction of Entrepreneurs	$\eta$	$10\mathrm{\%}$
Standard Deviation of $\mathrm{\Phi }(\omega )$	${\sigma }_{\omega }$	$20.7\mathrm{\%}$
Standard Deviation of Net Worth Shock	${\sigma }_n$	$10\mathrm{\%}$
Standard Deviation of Aggregate Productivity Shock

Table 2. Productivity shock

Cost of Enforcement	$0\mathrm{\%}$	$40\mathrm{\%}$	$70\mathrm{\%}$	$0\mathrm{\%}$	$40\mathrm{\%}$	$70\mathrm{\%}$
Statistic	Mean			Volatility
Output	1.01	1.00	0.99	$2.37\mathrm{\%}$	$2.20\mathrm{\%}$	$2.05\mathrm{\%}$
Net Worth	0.91	1.41	1.80	$7.10\mathrm{\%}$	$10.36\mathrm{\%}$	$12.44\mathrm{\%}$
Lending Rate	$0.47\mathrm{\%}$	$1.36\mathrm{\%}$	$6.22\mathrm{\%}$	$0.11\mathrm{\%}$	$0.30\mathrm{\%}$	$1.16\mathrm{\%}$

We measure volatility by standard deviations expressed in percentages.

Table 3. One-time wealth transfer

Cost of Enforcement	$0\mathrm{\%}$	$40\mathrm{\%}$	$70\mathrm{\%}$	$0\mathrm{\%}$	$40\mathrm{\%}$	$70\mathrm{\%}$
Statistic	Mean			Volatility
Output	1.01	1.00	0.99	$2.28\mathrm{\%}$	$2.32\mathrm{\%}$	$2.19\mathrm{\%}$
Net Worth	0.91	1.41	1.80	$18.49\mathrm{\%}$	$18.46\mathrm{\%}$	$18.92\mathrm{\%}$
Lending Rate	$0.47\mathrm{\%}$	$1.36\mathrm{\%}$	$6.22$	$0.36\mathrm{\%}$	$0.62\mathrm{\%}$	$1.87\mathrm{\%}$

We measure volatility by standard deviations expressed in percentages.

Table 4. Welfare loss

Cost of Enforcement	40%	$70\mathrm{\%}$	$40\mathrm{\%}$	$70\mathrm{\%}$
Statistic	Productivity Shock		Wealth Transfer
Consumption Equivalent of Welfare Loss	0.86%	1.84%	0.9%	1.89%

Welfare consequences of productivity shock and one-time wealth transfer

Table 5. Effect of limited enforcement and monitoring cost on output

	Monitoring and Verification Cost
	$\mu =5$	$\mu =10\mathrm{\%}$	$\mu =15\mathrm{\%}$	$\mu =20\mathrm{\%}$	$\mu =25\mathrm{\%}$
Degree of Enforcement	Percentage Change in Output
$\zeta =0\mathrm{\%}$	$1.82\mathrm{\%}$	$1.71\mathrm{\%}$	$1.66\mathrm{\%}$	$1.62\mathrm{\%}$	$1.59\mathrm{\%}$
$\zeta =40\mathrm{\%}$	$0.90\mathrm{\%}$	$0.89\mathrm{\%}$	$0.88\mathrm{\%}$	$0.88\mathrm{\%}$	$0.86\mathrm{\%}$
$\zeta =70\mathrm{\%}$	$-0.42\mathrm{\%}$	$-0.19\mathrm{\%}$	$-0.10\mathrm{\%}$	$-0.04\mathrm{\%}$	$0.00\mathrm{\%}$

Smaller $\mu$ means better credit information. Smaller $\zeta$ means better contract enforcement.

Percentage change in output relative to the steady-state output when $\zeta =70\mathrm{\%}$