Debt, Labor Markets and the Creation and Destruction of Firms

We analyze the financing and liquidation decisions of firms that face a labor market with search frictions. In our model, debt facilitates the process of creative destruction (i.e., the elimination of inefficient firms and the creation of new firms) but can also induce excessive liquidation and unemployment; in particular, during economic downturns. Within this setting we examine policy interventions that influence the firms’ financing and liquidation choices. Specifically, we consider the role of monetary policy, which can reduce debt burdens during economy-wide downturns, and tax policy, which can influence the incentives of firms to use debt financing.

Andres Almazan
University of Texas
11. Jun. 2013

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