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Borrowing constraints, financial frictions, misallocation and GDP per worker

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  • Iza, Amaia
  • Ostolozaga, Ibai

Abstract

The aim of this paper is to analyze the effect of relaxing borrowing constraints taking into account that firms may be facing either earnings-based or asset-based borrowing constraints on some aggregates such GDP per worker or TFP. We also analyze the impact on those aggregates of increasing the proportion of firms with earnings-based borrowing constraints. Using the World Bank Enterprise Survey, we show that the proportion of firms whose loans require collateral is lower in those countries whose bankruptcy laws facilitate reorganization. In addition, we show that there are no significant differences in the median/average contract-enforcement scores between countries where bankruptcy laws facilitate reorganization and countries where they do not, and that there is a significant negative link between the contract-enforcement score and the collateral-to-loan ratio. Furthermore, we also show that there is a significant positive correlation between the average proportion of firms in a country whose credit does not require collateral (with cash flow-based debt) with GDP per worker and TFP, but not with the debt-to-GDP ratio. We build a model that takes into account country characteristics in the proportion of firms whose loans require collateral and also in the average collateral-to-loan ratio. We find that policies aimed at increasing the proportion of firms that face borrowing constraints based on earnings rather than on assets, so as to reduce the misallocation of debt, may be as important as those aimed at reducing the collateral-to-loan ratio.

Suggested Citation

  • Iza, Amaia & Ostolozaga, Ibai, 2025. "Borrowing constraints, financial frictions, misallocation and GDP per worker," Journal of Macroeconomics, Elsevier, vol. 83(C).
  • Handle: RePEc:eee:jmacro:v:83:y:2025:i:c:s0164070424000740
    DOI: 10.1016/j.jmacro.2024.103660
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    More about this item

    Keywords

    Earnings-based borrowing constraints; Collateral-to-loan ratio; Misallocation; TFP; GDP per worker;
    All these keywords.

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

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