Event Date
"Borrowing Constraints, Markups, and Misallocation"
Abstract:
We document new facts that link firms’ markups to borrowing constraints: (1) firms with looser constraints have higher markups, especially in industries where assets are difficult to borrow against and firms rely more on earnings to borrow; (2) markup dispersion is also higher in industries where firms rely more on earnings to borrow. We explain these relationships using a standard Kimball demand model augmented with borrowing against assets and earnings. The key mechanism is a two-way feedback between markups and borrowing constraints. First, firms with looser constraints charge higher markups, as looser constraints allow them to attain larger market shares. Second, higher markups relax borrowing constraints when firms rely on earnings to borrow, as those with higher markups have higher earnings. The interaction between markups and borrowing constraints has important allocative efficiency implications. High-markup firms can be too large because they face looser borrowing constraints. Introducing borrowing constraints also lowers the overall TFP losses from markup dispersion.