Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/229039
Authors: 
Besley, Timothy
Roland, Isabelle
Van Reenen, John
Year of Publication: 
2020
Series/Report no.: 
ECB Working Paper No. 2425
Abstract: 
This paper studies the implications of perceived default risk for aggregate output and productivity. Using a model of credit contracts with moral hazard, we show that a firm's probability of default is a sufficient statistic for capital allocation. The theoretical framework suggests an aggregate measure of the impact of credit market frictions based on firm-level probabilities of default which can be applied using data on firm-level employment and default risk. We obtain direct estimates of firm-level default probabilities using Standard and Poor's PD Model to capture the expectations that lenders were forming based on their historical information sets. We implement the method on the UK, an economy that was strongly exposed to the global financial crisis and where we can match default probabilities to administrative data on the population of 1.5 million firms per year. As expected, we find a strong correlation between default risk and a firm's future performance. We estimate that credit frictions (i) cause an output loss of around 28% per year on average; (ii) are much larger for firms with under 250 employees and (iii) that losses are overwhelmingly due to a lower overall capital stock rather than a misallocation of credit across firms with heterogeneous productivity. Further, we find that these losses accounted for over half of the productivity fall between 2008 and 2009, and persisted for smaller (although not larger) firms.
Subjects: 
productivity
default risk
credit frictions
misallocation
JEL: 
D24
E32
L11
O47
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-4068-9
Document Type: 
Working Paper

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